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Gas Prices Could Dip Below $3 by Year-End: Lutz

According to David Lutz of Stifel, Nicolaus & Company, consumers are going to get a big boost to their wallets before the end of the year — and the source could surprise you. According to Lutz, the Environmental Protection Agency (EPA) is about to make some long-overdue adjustments to the federal ethanol mandate that's been acting as a stealth tax on American drivers for years. The result could push the national average price for a gallon of gas lower than anything we've seen since the depths of the Great Recession.

First, a word on how we got here. As Lutz explained last summer, the 2005 Clean Air Act mandated that refiners blend ever rising amounts of ethanol into gasoline. As long as U.S. gas consumption was rising, meeting the ethanol blend requirement was arguably misguided but no more so than other economic policies with unintended consequences.

What neither the EPA nor anyone else saw coming was the drop in demand for gas. Were the U.S. Energy Information Administration's website not down as part of the government shutdown, this link would show that gas demand hasn't been this low in over a decade.

The vast majority — around 90% — of American cars don't work with an ethanol blend over 10%. When the ethanol requirements continued to rise while demand for end product fell, the refiners were reduced to buying and selling Renewable Identification Numbers (RINs), which are, in effect, credits that allow refiners to meet the terms of the 2005 Clean Air Act without producing fuel that is unsuitable for most cars.

So as demand for gas falls, refiners need to buy more RINs. From just pennies-per-gallon in January, RINs had soared over $1.40 by last summer. Lutz says as much as 75% of the additional cost was passed along to the consumer.

Therefore, in an attempt to force cleaner burning fuels into the marketplace, the EPA created a policy that ended up artificially inflating the cost of refining gas when demand fell. So the refiners and consumers got gouged for not burning enough fossil fuels. Only the government could make refinery companies look sympathetic.

Here's the good part: Lutz sees the price of RINs falling, a sign that the EPA is finally getting around to modifying their absurd policy. Once RINs are out of the equation, Lutz says the price per gallon is going to fall lower.

"I'm not going to be stunned if we see gas prices going below $3 by the end of the year," Lutz says. "That's going to be a heck of a tailwind going into the holiday shopping season."

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