Ethanol Rebounds on Tax Credit, Discount to Gasoline

HOUSTON -- Following its worst quarter since early 2010, ethanol is in the midst of a boom that so far shows no sign of ending as refiners increase blending in order to take advantage of a tax credit that may expire at the end of the month, according to a fuelfix.com report. The biofuel also currently boasts a discount to gasoline.

Oil companies have gladly taken advantage of the 45-cents-per-gallon federal subsidy on ethanol, and the return from distilling ethanol from corn is now at its highest level in more eight months. However, a compromise being negotiated in Congress may end the tax credit, as CSNews Online previously reported.

"It looks like the tax credit will go away," said Jason Ward, analyst for Northstar Commodity Investments Inc. "The blend numbers have been phenomenal the last few weeks."

According to the report, Energy Department data states that Production of conventional gasoline blended with ethanol reached 5.26 million barrels per day during the week that ended July 1, a record, as supply dipped 4.8 percent to 18.6 million barrels.

Refiners must use 12.6 billion gallons of ethanol in 2011 and 15 billion gallons by 2015 under U.S. law, and fuel marketers can mix ethanol with gasoline to gain a discount that has averaged 23 cents over the last year.

"It makes sense that these guys are buying it, filling up their tanks and blending it in case the tax credit fails," said Jim Damask, a manager at alternative energy broker Biofuelsconnect. "At least they have something locked up. Regardless, if the credit goes away, they'll still blend because it's cheaper than gasoline."

If the tax credit disappears, the federal deficit will be reduced by $1.33 billion and $668 million will be dedicated to biofuels and new technologies, the report said. From that money, $253 million will be reserved infrastructure, such as the installation of more E15 fuel pumps. $107 million will extend an added credit for ethanol from small producers for one year while reducing it from 10 cents per gallon to 7 cents per gallon, and $308 million will extend a $1.01-a-gallon tax credit for cellulosic biofuels, which use non-food feedstocks such as corn cobs.