Midwest floods could up gas prices by another 15%

NEW YORK (CNNMoney.com) -- Continued flooding in Iowa and Illinois - the nation's top two corn-growing states - is inciting fears that the cost of the high-priced crop could soar even further, driving up ethanol and gas prices, too.

Days of heavy rain across the Midwest "corn belt" region have wreaked havoc on the crop, sending front-month prices to $7.08 a bushel on the Chicago Board of Trade Friday. Corn futures have risen for 7 straight trading sessions.

Since ethanol - a mandated ingredient in U.S. gasoline - is produced domestically with corn, rising crop prices could send already record gasoline prices even higher.

"The floods in the Midwest will have a major impact on ethanol," said Phil Flynn, senior market analyst at Alaron Trading in Chicago.

Gasoline in the United States is comprised of only about 6% to 10% ethanol, as mandated by federal and state governments. But Flynn believes gas prices could jump 10% or 15% if corn were to hit $10 a bushel and crude oil maintains its current high level.

With the national average of gasoline at a record $4.07 a gallon, according to AAA, a 15% increase would translate into an additional 61 cents.

"Crude oil is still the predominant factor why gas prices are high, but don't think that 6% to 10% isn't going to matter," Flynn said.

Congress' ethanol quandary

Congress continues to search for a way to relieve Americans' pain at the pump, and if gas prices spike another 50 or 60 cents, members may look to change their ethanol policies.

"Congress is going to have a hard time justifying mandating the use of ethanol in gasoline if we lose one-third of the corn crop," Flynn said.

But simply relaxing ethanol mandates may not be enough. According to the latest short-term energy report released by the U.S. Energy Information Administration, use of ethanol has reduced U.S. oil demand by 440,000 barrels a day.

If the nation consumes less ethanol, crude oil usage - and prices - could rise as well.

"For every drop of ethanol that we're not using, we'll be using (more oil-based) gasoline," noted Flynn.

Flynn argued that the market should determine ethanol's price, saying the root of the problem was Congress' rushing the use of ethanol in the first place.

"The problem with ethanol is that it was driven by the government and not by market forces," Flynn said. "Ethanol would have come on naturally had the government not acted."