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Blame Ethanol for Spike in Gasoline Prices: Lutz

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If the road to hell is paved with good intentions, as the old saying goes, than attempting to save Midwestern corn farmers by way of a Federal ethanol mandate is surely on a southbound highway of its own. This, as news about pain at the pump and the threat of rising gasoline prices swings into high gear.

But for all our analysis and rationalization that strife in the Middle East, summer driving season and growing overseas demand from places like China are keeping crude oil prices high, David Lutz, head of ETF trading at Stifel, Nicolaus says we're looking in the wrong place.

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"As a result of the 2005 Clean Air Act, refiners need to blend a certain amount of ethanol into gasoline every year, and every year the amount they blend in goes higher and higher," Lutz says in the attached video.

He says as long as U.S. gasoline consumption is going up, the 10% ethanol blend mandate "is not a problem." However, he points out that American gasoline usage is currently down and has been falling for the past four years, and recently touched a 13-year low. As a result, Lutz says refiners have hit "the Blend Wall."

"It has created a situation where refiners have to mix 10% ethanol into the gasoline they make — even though the market can't consume it all," he says, noting that most vehicles on the road today can't handle any more than E-10, as the mixed gasoline is known.

Now here's the tricky part. In order to adhere to this federal mandate, Lutz says, refiners have been buying ethanol credits, known as RINs (Renewable Identification Numbers), to offset their obligations. Predictably, this surge in demand for RINs has pushed the price to record highs.

"The price of these credits has gone from pennies on the dollar at the beginning of this year to almost $1.40 today, including a massive spike up in the last couple of weeks," Lutz says. "I would think the recent move that we've seen in gasoline prices, towards year-to-date highs over the last four months, half of it has been due to this ethanol policy."

Adding to the dilemma is the fact that refiners are exporting the gasoline they can't sell here, which keeps inventories low and prices high. And if you think that's bad, just wait until E-15 comes to market in 2015. Despite protestations — from automakers, the AAA, refiners, oil producers, outdoor power equipment manufacturers, and the American Petroleum Institute — the Supreme Court refused to block the increased use of ethanol required by the EPA's Renewable Fuel Standards.

To be fair, Corn Belt states and bio-fuel advocates applaud the proposed increase and have argued that concerns are unwarranted and the risks overstated. But with an estimated 95% of the U.S. auto fleet unable to handle E-15 fuel (and the risk of having auto warranties voided if they do use it) — as well as some 700,000 gas stations, 3,000 miles of pipelines, and hundreds of millions of lawnmowers and generators and the like at riskCongress is belatedly taking action in a bid to thwart a looming disaster.

Clearly there will be more hearings held on the matter, but it remains to be seen if the combined forces of big oil and small business are enough to slow the best intentions of the EPA and the drive to boost ethanol use by fifty percent.

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