Markets work smoothly, except when you create an artificial market size that hits all of a sudden, and only the speculators realized it:
The federal government created the market in special credits tied to ethanol eight years ago when it required refiners to mix ethanol into gasoline or buy credits from companies that do so. The idea was to push refiners to use the cleaner, renewable fuel, or force them to buy the credits.
A few worried that Wall Street would set out to exploit this young market, fears the government dismissed. But many people believe that is what happened this year when the price of the ethanol credits skyrocketed 20-fold in just six months, according to an analysis of regulatory documents and interviews with more than 40 people involved in the market, including industry executives, brokers, traders and analysts. …
In the end, energy analysts say, the outcome will be felt at the gas pump — as the higher cost of the ethanol credits gets tacked onto the price of a gallon of gasoline. (The credits, which cost 7 cents each in January, peaked at $1.43 in July, and now are trading for 60 cents.) …
Though the ethanol credits are traded by many major investment houses, they were created not on Wall Street but in Washington, on Capitol Hill and at the Environmental Protection Agency. At its inception, the so-called Renewable Fuel Standard was promoted as a means to reduce the nation’s reliance on foreign oil, fight global warming and provide a boost to farmers. The rules call for a set amount of ethanol, most of which is made from corn, and other renewable fuels to be blended with fossil fuels each year, with quotas assigned to individual refiners and importers. …
Every time they mix ethanol into gas, or import fuel already blended with ethanol, energy companies get a credit from the government, and that credit can be sold to other companies that don’t blend ethanol to help them meet federal requirements. If refiners fall short of their obligation, they can face fines of $32,500 a day. To monitor compliance, each gallon of ethanol is assigned a 38-digit Renewable Identification Number, or RIN. Six billion of them were generated in the first six months of this year. …
But the estimates Congress used about how much gas Americans would keep buying were wrong. When the biofuel credits were created, gasoline consumption was projected to grow 6 percent by 2013. But thanks in large part to the recession and more fuel-efficient cars, consumption has actually fallen.
As a result, refiners this year began hitting what is known as “the blend wall,” meaning that the amount of ethanol the government is requiring them to use is close to the maximum amount that can be blended into gasoline without creating problems for gas stations and motorists.
Distributing gasoline with greater levels of ethanol is more costly and corrodes gas station pumps and tanks. Raising the ethanol level in gasoline, therefore, would require gas stations across America to install new systems. Therefore, refiners have turned to RINs to meet their government obligations rather than blend more ethanol into gasoline.
Some say financial players saw it coming, and jumped into the market.
via www.nytimes.com
And insert your own reasons why markets don't work smoothly in the comments.
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