Ethanol, Fighting for Its Life, Gets a Temporary Reprieve

Source: By Matthew Philips, Bloomberg Businessweek • Posted: Wednesday, November 26, 2014

Gas pumps with a sign indicating the gas is containing up to 10 percent ethanol at a gas station in 2013

Photograph by Joe Raedle/Getty Images

Gas pumps with a sign indicating the gas is containing up to 10 percent ethanol at a gas station in 2013

The ethanol industry just avoided a death blow. Rather than deciding to permanently lower the amount of renewable fuels that have to be blended into the U.S. gasoline supply, as it first proposed a year ago, the Environmental Protection Agency last week opted to wait until next year to decide. The delay (official notice here) means this year’s ethanol quotas won’t be set until 2015 and ensures they will be lower than the original mandate envisioned. That’s not great news for ethanol producers, but it gives them more time to fight and avoids an outcome that could have been far worse.

When Congress first passed the Renewable Fuel Standard during the George W. Bush years, it set out a schedule of yearly mandates that rose steeply with what it thought would be the country’s perpetually growing demand for gasoline. Biofuel production has tripled since then, into a $30 billion-a-year industry.

But after the huge runup in oil prices in the mid-2000s and the 2008 financial crash, gasoline demand fell off. By last year, those ethanol mandates were running into what refiners dubbed the blend-wall, where ethanol exceeds 10 percent of the gasoline supply. Almost all the gas sold in the U.S. contains 10 percent ethanol, a blend known as E10, and gasoline marketed under that name isn’t allowed to contain more than 10 percent ethanol.

The real number for 2014 will probably be closer to 13 billion gallons, says Salim Morsy, an analyst at Bloomberg New Energy Finance. That would be a bit lower than the 2013 total and mark the first decline in the program’s history.

The EPA has to decide whether to comply with biofuel blending mandates

BNEFThe EPA has to decide whether to comply with biofuel blending mandates

Ethanol industry leaders pretended to be angry at the EPA’s decision to delay on Friday: “Deciding not to decide is not a decision,” Bob Dinneen, chief executive of the Renewable Fuels Association, said in a written statement. But the reality is that they’re relieved the White House didn’t choose a more aggressive plan pushed by refining and oil companies. He added: “The administration has taken a major step by walking away from a proposed rule that was wrong on the law, wrong on the market impacts, wrong for innovation and wrong for consumers.”

Right now, refiners can invoke two waivers to get out of having to blend biofuels: The first covers economic harm, and the second comes into play for scarcity. The average price of a gallon of ethanol for the past 12 months has been $2.08, significantly cheaper than gasoline. Any claim of economic harm doesn’t work.

A gallon of ethanol has averaged $2.08 for the past 12 months

Bloomberg A gallon of ethanol has averaged $2.08 for the past 12 months

Claiming a lack of supply works for only the advanced component of the mandate, which prescribes a quota for the amount of cellulosic biofuels that are made from plant waste and corn husks, rather than from the corn kernels themselves. Making fuel that way is more efficient and doesn’t eat into the food supply like corn-based ethanol. But it’s much harder to produce. The mandate set a quota for 1.75 billion gallons of cellulosic biofuel to be blended this year, when the reality is the industry was able to make less than 100 million gallons.

The oil industry was pushing for a third waiver to be added that would have taken into consideration what it says is a lack of distribution infrastructure. That would have allowed refiners basically to kill the biofuel mandate by refusing to invest in the necessary infrastructure to accommodate more renewable fuels into the gasoline supply. “It would’ve ripped the guts out of the RFS,” says Brooke Coleman, executive director of the Advanced Ethanol Council.

The oil industry has made no secret of its wish to add this third waiver, says Coleman. In the mid-2000s, when the Renewable Fuel Standard was first devised and implemented, opponents in Congress tried to put forth legislation that would have allowed the oil industry to sidestep it by not making the investments to accommodate more biofuels into the gasoline supply. At some point this year, the White House seems to have realized that by adding the third waiver, it would’ve been following the same path as prescribed by some of the renewable fuel industry’s staunchest enemies.

The EPA’s decision to delay a decision and back away from that third waiver comes as a big loss to refiners, which were poised to crush the biofuel industry. The American Fuel & Petrochemical Manufacturers, which represents such companies as Exxon Mobil (XOM) and Chevron (CVX), said it will sue the EPA for failing to issue the targets by last November.

Coleman at the Advanced Ethanol Council says the biofuels industry, after spending the past year backed into a corner, is ready to come out and fight to get multiyear mandates back on the table. Otherwise, if the EPA decides to set yearly mandates retroactively, based on how much gets blended into the gasoline supply, the ethanol market could plateau and stop expanding as it has.