December 8, 2011

Blender’s credit set to expire

By Kim Clark, Ag Program Manager for the Nebraska Corn Board

The end of the year is quickly approaching along with Christmas and the end of VEETC (Volumetric Ethanol Excise Tax Credit), or the blender’s credit. This time last year, we didn’t know if VEETC was going to be extended another year, but it came down to the December 31 deadline and Congress extended VEETC for one more year, and now it will be expiring at the end of the year on December 31.

The blender’s credit or VEETC, is a $0.45 per gallon of ethanol credit for blending with gasoline. The credit began to give big oil companies an incentive to blend ethanol with gasoline. It is commonly misunderstood who receives the blender’s credit. It is NOT ethanol plants, but the companies that blend the ethanol with gasoline to be sold at gas stations where you fill up your vehicle.

In order to keep the prices down at the pump, this savings is reflected in the price when you fill up your vehicle. Hence, passed onto you – the consumer.

With VEETC expiring at the end of the year, what does this mean for the price of ethanol blended fuel at gas stations beginning in 2012?

Below are some charts that show the average prices at the pump in October this year in Nebraska. The first chart shows the average prices at gas stations with VEETC available while the second chart shows the average prices to be paid at the gas station without VEETC. These are the prices will more than likely be seen the beginning of 2012.

Chart 1: Average October prices at gas stations with VEETC
chart 1_VEETC

Chart 2: Average October prices at gas stations without VEETC
chart 2_VEETC
Now, if we really did see prices at the pump similar to the prices in Chart 2, ethanol blended fuels are still cheaper, but with the mileage loss when using E85, it isn’t economical to use E85 based on this price.

Fortunately, there are a few more factors that play into the prices consumers pay at the pump. One main factor is the price of oil and the price of gasoline. Based on these two factors and their future’s price for January 2012, the chart below (Chart 3) is an estimate of prices at gas stations based on the current futures market. These prices fluctuate daily so this is only an estimate.

Chart 3: An estimate of January gas station prices based on the price of oil and ethanol in the third week of November.
chart 3_VEETC

The prices in Chart 3 are based on the futures prices. These prices are comparable to the prices we saw in October because the ethanol futures are $0.46 per gallon lower than gasoline. Remember, this is only an estimate based on the current futures market.

Why was there such a sharp decrease in ethanol price compared to a couple months ago? The answer to the question is somewhat complicated, but in short, companies are blending ethanol with gasoline this year to take advantage of the blender’s credit and storing it to be used in 2012 leading to an additional supply of ethanol blended fuel with a low demand.

There is nothing wrong with taking advantage of cost savings, especially since the price is being reflected at gas stations. As I am writing this blog, the futures market for oil and ethanol are the main contributing factors to the price of ethanol blended fuel at gas stations, but other factors also play a role.

In the next blog, I will discuss how the price at the gas station affects consumer, specifically flex fuel vehicle owners.

Read other blogs about VEETC and the importance of ethanol in Nebraska:

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