Ethanol leading to a corn-based bubble

An ethanol plant in Missouri (AP file photo/Southeast Missourian, Aaron Eisenhauer)

A corn-based bubble is building on the horizon, with expectations of a large oversupply of high-priced ethanol that has nowhere to go.

The phenomenon is a product of environmental requirements and subsidies that are currently leading refiners to buy ethanol at record prices, according to analysis from the U.S. Energy Information Administration.

Refiners and other parties that produce fuels are required by the U.S. Environmental Protection Agency to buy supplies of ethanol to blend with their gasoline. For each gallon of ethanol they blend into their fuel, refiners get a credit, also known as a Renewable Identification Number, or RIN.

Refiners need to acquire a set amount of RINs annually to meet EPA requirements, and can also do so by buying RINs from other parties.

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While the current supply of corn-based ethanol is down, because of a drought that affected production, output is expected to grow to levels that will leave the country with an oversupply of the fuel that will go unused unless something changes.

That’s because the EPA is requiring refiners to buy more ethanol at a time when fuel makers say they can’t blend any more of it into their gasoline.

The nation’s consumption of gasoline is falling and refiners say they can only replace 10 percent of their main gasoline blend with ethanol.

Ten percent of the nation’s expected 2013 gasoline consumption 13.3 billion gallons, a volume of ethanol that would fall within the mandate this year. But 10 percent of gasoline consumption will likely fall short of mandates in the future, EIA analyst Sean Hill said.

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While the EPA and U.S. Department of Energy have insisted that gasoline blends including as much as 15 percent ethanol is safe for most vehicles, automakers and the oil industry have disagreed.

Without marketing more of a higher blend of ethanol, refineries could be left blending ethanol into gasoline that is not used, just to meet EPA requirements, Hill said.

An alternative could be for refiners to start making more E85, which is a blend of gasoline with 85 percent ethanol, Hill said.

But most gasoline stations do not sell E85 and the majority of fuel makers have no way of changing retail stations to sell more of that fuel.

Read FuelFix’s ongoing coverage of the ethanol debate:

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