Ethanol is consumed primarily as a gasoline blendstock at 10 percent by volume of finished gasoline, which is often referred to as E10. Every $1-per-gallon change in the price discount or premium of ethanol relative to gasoline results in a potential pass-through of around $0.10 per gallon in retail E10 gasoline.
Beginning in late June 2012, when the extended Midwestern drought led the U.S. Department of Agriculture (USDA) to significantly reduce the corn production estimates in its World Agriculture Supply and Demand Estimates (WASDE) report, ethanol prices rapidly increased after several months of relative stability. Ethanol spot prices rose from around $2.10 per gallon in late June to reach a year-to-date high of $2.70 per gallon on July 25. As discussed above, if that 60-cent increase were all passed through to consumers, it would raise retail E10 gasoline prices by $0.06 per gallon, but there is little evidence this has occurred. Over this same period, the spot price of Brent crude oil increased about $13 per barrel ($0.31 per gallon), while the spot price of Gulf Coast conventional gasoline rose more than $0.20 per gallon and New York Harbor spot RBOB rose about $0.16 per gallon over a similar period. Even after the recent sharp increase in ethanol prices, it was still selling at around a $0.20-per-gallon discount to RBOB in New York Harbor at the end of July. The national average retail gasoline price only increased about $0.15 per gallon during the month of July, indicating no discernible pass-through pressure on retail prices beyond those of crude oil and wholesale gasoline.
Banked RFS RIN credits provide an additional cushion that limits the effect of higher ethanol prices on retail gasoline prices. There are an estimated 2.5 billion gallons of banked RIN credits available for compliance this year due to production beyond the mandated level in previous years. The availability of banked RINs should ameliorate tightness in the market for the remainder of the year in the event physical ethanol volumes fall short of the 2012 RFS mandate.