Prices at the gas pump are on the rise again. One might assume that the usual suspects are at work, like strong economic growth in the U.S. and developing countries such as India and China, or ongoing supply kinks as the Gulf Coast struggles to recover from Hurricane Katrina, or even instability in major oil-producing countries.
While all of these factors may play a part in raising domestic fuel prices, so is another element: an ethanol shortage. President Bush has highlighted ethanol as an alternative to foreign oil, and General Motors (NYSE:GM) and Ford (NYSE:F) have been promoting ethanol use to bolster their images as environmentally conscious companies, but these developments probably are only starting to drive demand. To that end, the Los Angeles Times and the Associated Press commented Tuesday on a potential ethanol-supply crunch.
Although higher ethanol prices are a near-term positive for major producer Archer Daniels Midland (NYSE:ADM) and much smaller player MGP Ingredients (NASDAQ:MGPI), ethanol's role in higher pump prices is likely to invite greater scrutiny of the fuel and its producers. This spring, in fact, might bring a major political test for ethanol, with a major potential impact for its makers.
A more significant near-term factor is that many refiners, including Valero Energy (NYSE:VLO) and Exxon Mobil (NYSE:XOM), plan to stop adding methyl tertiary butyl ether, or MTBE, to fuel beginning on May 5. There is evidence that MTBE causes cancer, and refiners are worried that they face lawsuits if they continue to use the chemical. The plan is to use ethanol to offset the loss of the additive, which makes up about 10% of every gallon of gasoline in places where it is used.
However, ethanol supplies are already tight. Wholesale prices stand at about $2.75 a gallon, about $0.50 higher than usual and more than $0.14 above the average per-gallon nationwide retail price for regular gasoline. Couple that with government subsidies and tax breaks for ethanol and its producers, and it looks like a very expensive alternative fuel indeed.
More ethanol plants are on the way, and the added supply should ease prices. But in the meantime, ethanol could be singled out as part of the problem at the pump. If so, it will raise questions over the value of government subsidies that bolster industry profits. For ADM and MGP, the challenge will be convincing the public and politicians that ethanol is worth the price.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
