Oil Prices to Reach All-Time High

Even without VEETC ethanol is still making gasoline cheaper.

Published on: Jan 12, 2012

In its monthly short-term outlook, the Energy Department expects U.S. benchmark crude oil prices to average over $100 a barrel in 2012 and touch an all-time high amid rising demand as global economies grow. This report signals continuing high energy costs for farmers already squeezed by increasingly expensive fuel. West Texas Intermediate crude is forecast to average $100.25 a barrel this year, up 5.7% from the level of 2011. The 2012 estimate was revised up by 2.3% from the department's projection a month ago, and would be a record high not adjusting for inflation.

Retail diesel will average about $3.85 a gallon in 2012, up 1 cent from 2011 and a record high. The American Farm Bureau Federation says it will cost a farmer nearly $1,040 to fill the 270-gallon tank on a Case IH 9370 tractor with diesel. That's up 43% from 2010 and up 77% from 2009.

The U.S. Energy Department expects China and the Middle East to lead growth in global petroleum consumption over the next two years. Additionally, any supply disruptions in key producing regions could spike oil prices higher. The Energy Department projected global oil consumption at a record 89.38 million barrels a day in 2012.

The Renewable Fuels Association points out the saber-rattling of Iran in the Strait of Hormuz has had an impact on fuel prices. But many are erroneously blaming ethanol because of the end of the tax incentive for ethanol use known as VEETC. RFA says it is true that Congress raised taxes on gasoline blended with ethanol when VEETC expired. But that only translates to about 4.5 cents per gallon of E10 ethanol blends.

But that tax increase doesn't mean ethanol blends are now somehow more expensive than pure gasoline.  In fact, as RFA Vice President of Research Geoff Cooper notes, the wholesale price of ethanol has been around 60 cents cheaper than that of gasoline in recent weeks and has traded at a discount to gasoline for much of the past few years.  

Additionally, with ethanol representing 10% of the nation's gasoline supply, it is helping to put downward pressure on oil and gasoline prices by extending supplies.  An Iowa State University/University of Wisconsin study pegged that savings as 25 cents per gallon on average over the past 10 years and 89 cents per gallon in 2010 alone.