Are Lower Gas Prices Threatening Ethanol's Competitiveness?

Are Lower Gas Prices Threatening Ethanol's Competitiveness?

Economists say recent drop has been large enough to potentially threaten ethanol competitiveness

Wholesale gasoline prices in the U.S. have declined by about a dollar per gallon since June. While that's likely good news for many consumers, a recent farmdoc daily article, prepared by Scott Irwin and Darrel Good of the Department of Agricultural and Consumer Economics at the University of Illinois, questions if it has an effect on the competitiveness of ethanol.

To decide, the economists first compare wholesale ethanol and wholesale gasoline (CBOB) prices to determine the ethanol blending margin.

Gas pumps with a sign indicating the gas is containing up to 10 % ethanol are seen at Victory gas station on November 15, 2013 in Pembroke Pines, Florida. (Photo by Joe Raedle/Getty Images)

The economists found that recently, wholesale prices for ethanol and gasoline have converged to a similar level. The net result from a conventional standpoint, they write, is that ethanol blending margins are basically at the breakeven level. Further declines in CBOB or increases in ethanol, they said, will drive margins into the red.

Diving into several alternative comparisons and discussing the nuances of each, the economists later note that the initial comparison on wholesale prices, with a breakeven price ratio of 1.0 is likely the most accurate.

What's more, the economists say that market history shows the ratio is unlikely to move above 1.0 for "any length of time" and "market adjustments to maintain the competitive position of ethanol are likely to be rapid."

Higher ethanol production and lower ethanol prices, the economists continue, "have proven quite effective in the past at maintaining ethanol's place in gasoline blends and are likely to continue to do so in the future."

To read more about the economists' conclusions, visit the Nov. 12 article Do Falling Gasoline Prices Threaten the Competitiveness of Ethanol? on farmdoc daily.

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