Despite a 60 percent increase in ethanol prices, a new record hit last winter, ethanol blending margins stayed positive for most of the period. This analysis from the University of Illinois credits the surprising outcome to highly positive blending margins at the start of the spike, which provided a healthy margin cushion as ethanol prices rose, as well as a 20 percent increase in wholesale gasoline prices.

[A]n analysis by the U.S. Department of Energy in November 2012 calculated a “break-even price of ethanol, above which it is more economic for the refiner to reduce ethanol volumes and alternatively produce more octane within the refinery.” That analysis indicates that the breakeven ethanol price is about 10 percent higher than the price of CBOB gasoline. That is, if the price of ethanol is less than 110 percent of the price of CBOB gasoline, there are positive economic returns to blending E10 for octane enhancement rather than producing more octane from other petroleum processes in the refinery… The ratio was much less than 110 percent for most of the period, and during the recent ethanol price spike rose above this breakeven level only during the last two weeks of March 2014. So, despite the huge spike in ethanol prices (about 60 percent) this analysis shows that ethanol blending margins remained positive for all but a brief period. The key to explaining this surprising outcome is two-fold. First, wholesale gasoline prices were substantially above ethanol prices when the spike in ethanol prices began. This reflected crude oil prices that remain at relatively high levels and a drop in corn prices. Second, not only did wholesale gasoline prices start at relatively high levels, they increased substantially at the same time as ethanol prices. At the end of December 2013 the Chicago CBOB price was $2.49 per gallon, but had risen to $2.95 per gallon by mid-May 2014. This is an increase of almost 20 percent.

The analysis concludes that ethanol blending margins becoming negative for such a short period of time with record high ethanol prices shows how firmly entrenched ethanol has become as the cheapest source of octane currently available for E10 gasoline blends.