Sometimes a picture is worth a thousand words. It is instructive to look up a chart of the prices for ethanol, oil and wholesale gasoline. If you go to one of a dozen easily navigated financial sites, you can take a look at price relationships between these three commodities by charting the December contracts in each.
If you examine the December 2007 futures contract for oil, wholesale unleaded gas and ethanol you will see that gasoline and oil have a very similar pattern, namely, rising throughout the summer months, peaking in July and falling through about August 20th. From that time until now, there has been a steady climb in both oil and unleaded gasoline for the December months.
During the the same months, ethanol prices have been falling with a steep decline beginning about the time oil and gas prices began rising in late August. The December 2007 ethanol contract prices have fallen off summer highs around $1.90 to about $1.58 to $1.60. This follows the pattern for the December corn contract. If ethanol is a substitute for gasoline, at some point, higher wholesale gas prices should increase demand for ethanol substitution and bring its price up. If it really isn't a substitute then it will follow corn prices. We'll keep watching.
