HardAssetsInvestor

Written by Brad Zigler  |

March 01, 2011

Gas Prices High? Ethanol Won't Help

Details

Okay, kids. Time to compare and contrast.

Anybody who drives knows that pump prices have been rising recently. The trend started long before the unrest in Libya, though the tumult in North Africa was an additional shock. Prices for West Texas Intermediate crude, which had been languishing, have shot up, compressing domestic refiners' margins. The rapid advance in product prices—heating oil and gasoline, in particular—had previously fattened refiners' grosses to levels not seen since the economic meltdown of 2008.

Oil Refining Margin

Over the past couple of trading sessions, though, equipoise has been restored as crude prices backed down and product prices remained firm.

Ethanol refiners haven't been so lucky. Though finished fuel prices have been rising at a faster clip than gasoline, the relentless uptrend in corn prices—the input for domestic ethanol production—has narrowed refiners' margins mightily over the past few months.

Ethanol Vs. Gasoline Prices

Corn's jumped 14.9 percent this year, but ethanol prices have ratcheted only 10.2 percent. Refiners haven't been helped by marketing the other refinery output, distillers' dry grains (DDGs), either. Prices for DDGs have been soft. This year, in fact, prices have eased 2.4 percent.

All told, ethanol refiners' crush margins have narrowed 24.1 percent this year. The CBOT board spread's weakened to just 92 cents a bushel.

Corn-Ethanol Crush Margin

Ethanol's cheaper than gasoline—by nearly 33 cents a gallon now—which encourages blending the alcohol fuel into tank fillers, where permitted.

Motorists shouldn't expect a price break for blended fuel, though. With the current volatility in fuel prices, in fact, it's likely we'll be paying full-boat petroleum margins for petrol as we head into spring.

Happy driving.