Blending margins not hurt by recent strong ethanol pricing

By Susanne Retka Schill | May 27, 2014

Despite the huge spike in ethanol prices of about 60 percent, a recent analysis by University of Illinois economist Scott Irwin, shows that ethanol blending margins remained positive for all but a brief period.  Irwin quoted a 2012 U.S. DOE analysis that calculated a break-even price of ethanol, “above which it is more economic for the refiner to reduce ethanol volumes and alternatively produce more octane within the refinery” at 10 percent higher than the price of CBOB.

Two factors explain the surprising outcome of positive blending margins in spite of record high ethanol prices, Irwin explained. “First, wholesale gasoline prices were substantially above ethanol prices when the spike in ethanol prices began. This reflected crude oil prices that remain at relatively high levels and a drop in corn prices.  Second, not only did wholesale gasoline prices start at relatively high levels, they increased substantially at the same time as ethanol prices.  At the end of December 2013, the Chicago CBOB price was $2.49 per gallon, but had risen to $2.95 per gallon by mid-May 2014.  This is an increase of almost 20 percent.” CBOB prices were used, rather than RBOB, as CBOB is the feedstock for about two-thirds of the finished gasoline used in the U.S. 

The ethanol blending margin is important for several reasons, Irwin explained, including the net impact of ethanol on gasoline prices at the pump, compliance costs for the renewable fuels standard (RFS) and the pricing of RINs, the renewable identification numbers that accompany ethanol shipments that are used to demonstrate compliance with the RFS volumes.

“The fact that the ethanol blending margin became negative for such a short period of time with record high ethanol prices speaks to the firmly entrenched position of ethanol as the cheapest source of octane currently available for E10 gasoline blends,” Irwin concluded. To read the full analysis, “Recent Ethanol Blending Margins,” posted to FarmDocDaily, as well as links to earlier articles, click here.