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Ethanol Law Could Lead to Rise in Gas Prices

Compliance costs are skyrocketing this year


Gas_pump_630_flickrA federal law requiring corn ethanol in gas could force prices higher in the near future.

The cost of the law — with requires fuel to contain a certain percentage of corn-based ethanol — has climbed from a mere a few cents last year to $1.10 last Friday, reports The Wall Street Journal.

As the price to earn the ethanol credits goes up, the price of gas will follow. Bill Day, a spokesman for Valero Energy (NYSE:VLO), said, “Eventually that cost is going to get passed along.”

The 2007 law requires that the amount of ethanol used in gasoline increase each year. Last year’s total of 13.2 billion gallons of ethanol used as fuel barely met the required amount. The proposed target amount for this year is 14 billion gallons and that’s producing the spike in prices.

Also complicating matters is the so-called “blend wall”. Any percentage of ethanol in gas above 10% runs the risk of exceeding the tolerance of most engines. With the percentage right at 10% now — American’s used 13.2 billion gallons of ethanol in 133 billion gallons of fuel — any increase in the required amount will exceed engine’s tolerance for ethanol unless more fuel is consumed.

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