MarketWatch reported today that the price of ethanol has seen a 30-percent price increase so far this year, taking the price of gasoline up with it, since a good majority of "gasoline" sold today is around 10 percent ethanol.
The average price of a gallon of gas today is $2.30, according to FactSet data, but this has varied since the beginning of 2014. Despite the recent surge, ethanol prices have also proved to be rather volatile with reports of it dropping 8 percent this past Thursday after falling 10 percent just the day before.
It wasn't until March that the alternative fuel saw a significant increase in price, ultimately causing the price of regular gasoline to go up as well. So why does this price spike have a direct correlation on the price of gas?
The 10 percent of ethanol that goes into regular fuel is the culprit. Adding ethanol to the mix originally resulted in about a 5-cent-per-gallon decrease, according to Tom Kloza, GasBuddy.com's chief oil analyst. This is because ethanol prices at the time were significantly cheaper that gasoline. But now that prices have gone up, adding that 10 percent to regular fuel becomes more expensive.
Kloza says, "The skyrocketing cost of ethanol has altered that economic calculus," as ethanol prices over the past few weeks have been around $4/gal or higher.
So, essentially the $4-a-gallon ethanol is being blended with the $2.50-a-gallon gasoline, resulting in an overall increase in price, which was recorded at $3.566 a gallon according to AAA's Daily Fuel Gauge Report.
Read the full report at MarketWatch here.
