NEW YORK ( TheStreet) -- Gas prices are on a trajectory to go up perhaps another 50 cents a gallon this summer, and not because of any shortage or geopolitical crisis. This price spike, if it happens, will be self-inflicted, attributable solely to a federal program on ethanol.
Since the 1970s, the Environmental Protection Agency has been overseeing a program adding ethanol to domestic gasoline, designed to lower carbon monoxide emissions. While this program has noble environmental aims, the EPA mandates have had limited environmental impact and are now threatening both the refiners that produce gasoline and the rest of us who need it.
That's because the EPA Renewable Fuel Standard, or RFS, program increases every year the volume of "renewable fuels" that must be blended into gasoline to be legal for sale in this country. This has come into direct conflict with a shrinking demand for gasoline here in the U.S., dropping fast through better engine efficiencies and a slower economy.
But what happens if you're a refiner who needs to put more ethanol into less gasoline?Well, you could make a more richly blended gasoline known as E15 (for 15% ethanol), a product the AAA expressly does not recommend as a fuel and one that will likely void your car's warranty if you use it. Or, if you are a refiner who wants to sell a gasoline product with less ethanol, you can blend only a little ethanol in your product and buy an available ethanol credit for the balance of your EPA-mandated volume. These credits, called Renewable Identification Numbers, or RINs, have increased massively in price as refiners have come up against what they call the "blend wall." Prices on RINs have exploded from around 5 cents a gallon to over a dollar in less than eight months. The explosion in the price of RINs is the market proof the EPA renewable fuels program is very rapidly contributing to a spiking price of gasoline being sold to the public. As EPA ethanol volume mandates continue to increase through 2014 as gasoline demand continues to fall, RIN prices will continue to explode, destroying refining margins and continuing to drive retail prices higher.