June 18, 2008 / 7:55 PM / 9 years ago

Midwest floods may add to gasoline misery

4 Min Read

NEW YORK (Reuters) - U.S. gasoline prices, which have already jumped to a nationwide average over $4 per gallon, may get an extra nudge from soaring costs for gasoline-additive ethanol as the worst floods in 15 years hit the Midwest Corn Belt.

The outlook is bad news for American motorists already suffering sticker shock at the gas pumps at the start of the summer driving season.

"If we have prolonged rail and barge delays of getting Midwest ethanol to all the coast, then it will have an absolute upward impact on prices right now," said Stephen Schork, editor of The Schork Report in Philadelphia. "I could probably see it adding another nickel to another dime to the prices at the pump as we head toward the July 4th holiday."

The cost of corn-based ethanol, a blendstock that now makes up about 7 percent of the U.S. gasoline pool, has jumped 20 percent in two weeks as flooding damages Midwest corn crops, shuts down distilleries and disrupts rail traffic to get the ethanol to market.

The surge brings the price of ethanol to about $2.90 a gallon, still well below the overall price of finished gasoline. But the increased price of the key ingredient could still filter down to drivers.

"It's certainly not helping gasoline prices," said Sander Cohan, gasoline and biofuels analyst with Energy Security Analysis Inc in Boston. "The silver lining is that ethanol is only blended up to 10 percent into gasoline, so it only has a small effect compared to say, the price of oil."

Fuel suppliers have been blending increasing amounts of ethanol into gasoline in recent years to meet clean air regulations and a federal mandate to boost the consumption of renewable energy supplies.

Ethanol Companies Squeezed

Corn prices matched a record high above $8 a bushel on Wednesday on concerns about the effect of the floods on the U.S. corn crop, posing a threat to the nascent ethanol industry that depends on affordable corn.

"If we do see these forecasts of maybe a 10 percent drop in a corn crop come to fruition, it becomes less likely we're going to see any kind of moderation in the corn prices," said Tom Knight, an energy trader at Truman Arnold in Texarkana, Texas.

"I think we'll see more small- and mid-size ethanol plants down because they are just not willing to run with negative production economics," Knight said.

Already, VeraSun Energy Corp has announced that it is delaying the opening of two Midwest ethanol distilleries until market conditions improve.

The delay will add to a decrease in production due to flood closures. So far, two ethanol plants in Cedar Rapids, Iowa, one owned by Archer Daniels Midland and the other owned by Penford Corp, were shut by the flooding.

According to the Iowa Renewable Fuels Association, a total of 300 million gallons per year of ethanol production capacity was forced offline by the floods.

A slump in domestic ethanol production, could lead to increased imports from Brazil, the world's second largest ethanol producer after the U.S., despite a 54-cent-per-gallon tariff on the fuel, experts said.

"The supply chain will catch up ... if the prices stay this high, then people will definitely start looking toward Brazilian cane ethanol," Cohan said.

Editing by Christian Wiessner

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