Since the end of February, gasoline prices are up 12 percent even though the price of oil is fairly steady. If you're wondering what's driving gas prices upward, look no further than the federal ethanol mandate. When regulators decreed ethanol usage mandates in 2007, they assumed gasoline consumption would continue to increase. They further assumed that the amount of ethanol forced onto the market wouldn't overwhelm the system. But one recession and millions more fuel-efficient cars later, gasoline usage has actually decreased over the last several years.
Due to this declining market, refiners are encountering what's known as a "blend wall," wherein the total gallons of ethanol needed to satisfy the federal mandate is more than the mandated 10 percent blend. To get around this problem, the EPA tried to "persuade" refiners to increase the share of ethanol in each gallon of gasoline to 15 percent -- E15 gasoline -- but consumers (not to mention manufacturers) are reluctant to assume the risk of engine damage from E15.
In a version of cap-and-trade, refiners not meeting their ethanol quota are then forced to purchase renewable identification number credits, or RINs, from companies that used more ethanol than their requirements dictate. The cost of RINs has surged since the beginning of the year, however, and that price is passed along at the pump. Other retailers skirt the mandate by exporting gasoline, since exports are exempt -- but that leads to both a supply shortage here and increased prices. So the EPA is indeed cutting the consumption of oil, but not in a way that maintains our economic viability -- which is just fine to the Obama administration.