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
Although higher ethanol prices are a near-term positive for major producer Archer Daniels Midland
A more significant near-term factor is that many refiners, including Valero Energy
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.