Friendly Fire: Ethanol Battles Oil As COVID Destroys Demand For Both

Source: By Brentan Alexander, Forbes • Posted: Tuesday, May 5, 2020

One of the more fascinating ongoing sagas of the Trump era has been the pitched battle between ethanol producers, the farmers that supply their corn, and the refiners who transform crude oil into finished fuels. The Trump administration has enacted multiple policy changes over the last three years, but in the biofuels space the winners and losers both tend to reside on the GOP-side of the aisle. With COVID-19 wreaking havoc on demand for oil and, by association, ethanol, the administration is at a crossroads: relax ethanol mandates as requested by multiple Republican governors and help refiners, or strengthen mandates to shore up corn and ethanol produced heavily in red states.

Ethanol and oil are linked through the Renewable Fuel Standard (RFS), established by law under the Energy Independence and Security Act of 2007. Formulated during a time of falling U.S. oil production, the ethanol blend requirement was seen both as an economic benefit to Middle-America and a strategy for domestic energy security. Every year, the U.S. Environmental Protection Agency (EPA) sets Renewable Volume Obligations for a variety of biofuels, chief among them ethanol, that refiners must blend into their finished fuels for final sale. Compliance is tracked through a credit system (Renewable Identification Numbers) that also allows refiners and other obligated parties to trade credits. To aid small refiners from the added compliance costs under the RFS, a waiver process was also established to exempt qualifying refiners from the obligations of the RFS.

Throughout the last few years, the Trump administration has struggled to implement the RFS protocol in a way that satisfies allies in the Midwest and on the Gulf Coast. At first, the administration worked to undermine the program: The number of waivers granted to refiners skyrocketed from under 10 to over 30 in the first two years of the administration. Large refiners were given waivers, and the EPA ignored the missing gallons in the annual mandates, effectively reducing demand for biofuels by billions of gallons overnight. Incensed, Chuck Grassley (R-IA) noted that the EPA “screwed us” and the lobbyists for farmers and ethanol producers unloaded criticism on administration officials. A lawsuitclaimed the EPA overstepped its bounds in issuing the waivers.

To tamp down the rebellion, Trump promised farmers 15 billion gallons of ethanol mandates for 2020, but when the EPA released the associated rule, it failed to live up to the original promise. Agricultural groups spoke openly of betrayal and deceit. But then a court sided with the ethanol industry, and ruled that the EPA only has authority to extend waivers granted prior to 2010; new waivers were off the table. A few weeks ago, the Tenth Circuit declined to review the decision in a full rehearing, and the Trump administration recently signaled it would not appeal.

Now the EPA has a decision to make: Rescind waivers and enforce the RFS, likely assisting ethanol in the medium term once demand recovers, or grant new hardship waivers due to COVID-19 and further undermine ethanol demand and the industry as a whole. With an election in November and multiple swing states throughout the corn belt, a full-scale pause of the RFS seems unlikely. But rescinding waivers as refiners suffer losses and suspend operations is also hard to conceive, especially considering USDA assistance programs conspicuously missed ethanol. What was a nagging political issue has now been magnified by the full-blown crisis created by COVID-19; the Trump administration is caught in the middle, apparently unsure (again) what to do.  However they act, expect unhappiness all around and further battles to come.