End of Ethanol Subsidies Could Increase Gas Prices Marginally

The end of the subsidy portends an increase in manufacturing costs. Ethanol blenders get a 45-cents-a-gallon tax credit, according to USA Today. When the credit ends Sunday, those costs will most likely be transferred to the consumer at about 4.5 cents per gallon for regular unleaded gasoline, which typically contains a 10% ethanol blend called E10.

The tax credit is said to cost the federal government $6 billion a year. Congress decided to end the credit over the summer in light of new pressures to reduce the federal deficit. Other factors, such as the increasing independence of the ethanol industry and a steady increase in corn prices (from which most U.S. ethanol is derived), helped persuade politicians to kill the subsidy. Nearly 40% of the United States’ corn crop currently goes to ethanol and byproducts, according to the New York Times.

While higher ethanol prices are certain to increase the cost of gasoline production next week, other factors — most importantly, the volatile oil market — could affect the price of gasoline more quickly.

Gas prices averaged $3.28 a gallon on Monday, according to AAA, up from $3.07 a year ago. E85 ethanol averaged $2.95. Since ethanol is less energy-dense than gasoline, however, the price when adjusted to equate to a regular gallon was $3.88 per gallon, according to USA Today.v

End of Ethanol Subsidy Could Raise Gas Prices for 2012 (USA Today)