U.S. Ethanol Mandate Puts Squeeze on Oil Refiners

Source: By RYAN TRACY, Wall Street Journal • Posted: Monday, March 11, 2013

The cost of complying with a federal mandate to use corn ethanol in fuel has risen sharply in the past few months, putting a squeeze on oil refiners.

The price of each credit that refiners need under the law topped $1.00 Friday, up from just a few cents last year.

“Eventually that cost is going to get passed along,” said Bill Day, a spokesman for Valero Energy Corp., VLO -2.17% which sells gasoline to about 5,000 filling stations in the U.S


Valero and other big refiners, such as Marathon Petroleum Corp. MPC +0.84% and Tesoro Corp., TSO +1.13% haven’t publicly estimated how the compliance costs would affect earnings. The industry has been reporting steady profits recently.

The new expenses “will have an impact on refinery margins,” said Tom Kloza, chief oil analyst with the Oil Price Information Service. Refiners could attempt to pass the higher costs on to consumers but so far, that hasn’t happened, he said.

The sharp rise in ethanol-credit prices reflects broader problems with the 2007 law, which sought to drive increased use of renewable fuels. Another piece of the mandate, requiring industry to buy fuels made from nonedible plants, has run into trouble because there isn’t enough supply to meet federal requirements.

The ethanol provisions require that the oil industry blend more of the corn-derived fuel with petroleum-based gasoline each year. The government required the use of about 13.2 billion gallons of ethanol last year. When an ethanol maker produces a gallon, the company receives a credit representing roughly that much ethanol. Such credits are subsequently bought by refineries to establish how much ethanol they have blended into fuel. If a refinery doesn’t have enough credits, it can be fined.

Until now, refiners have been able to hit their quotas because about 10% of U.S. gasoline is ethanol. The U.S. consumed about 133 billion gallons of gasoline last year, according to the Energy Information Administration. That meant that about 13.3 billion gallons of ethanol was blended into gasoline, just above the requirement of roughly 13.2 billion gallons.

The Environmental Protection Agency’s proposal for this year, which could be made final as soon as next month, could force refiners and fuel importers to use more than 14 billion gallons of ethanol.

But refiners are reluctant to blend gasoline with more than 10% ethanol largely because auto makers say most vehicles can’t handle a higher rate. That 10% figure is known as a “blend wall,” keeping more ethanol from entering the market.

If Americans don’t buy more gasoline this year than last, the blend wall creates a conflict with the government’s ethanol requirement. The oil industry is pushing the EPA to lower the 2013 ethanol requirement.

Fears that they will hit the blend wall appear to have made refiners and fuel importers eager to buy credits on the open market, pushing credit prices higher. On Jan. 14, the price of a credit rose above nine cents for the first time in more than two years, according to the Oil Price Information Service. The price has jumped more than tenfold since.

“I’m reluctant to say that we’ve hit the blend wall, but there certainly is the perception we have or that we are about to,” said Mr. Kloza, the analyst.

The Renewable Fuels Association, an ethanol-industry trade group, said refiners could market fuel blends with 15% ethanol. That would allow more ethanol to be sold and make more ethanol credits available. Lawmakers “knew that they were driving changes to the marketplace as well, and it’s those marketplace changes that the oil companies are resisting,” said Bob Dinneen, the association’s president.

Refiners say consumers don’t want 15% blends, largely because auto makers generally advise against using blends that high, except for models such as flex-fuel vehicles and some 2013 vehicles.

Marathon spokeswoman Angelia Graves said the high prices for ethanol credits showed that the government’s mandate is “unworkable.”

The EPA said it would determine this year’s ethanol mandate after a public comment period closes in April and declined to address criticism of the rule until then.

Stephen Brown, Tesoro’s vice president for federal-government affairs, said the situation could give U.S. refiners an incentive to export gasoline because exports aren’t subject to the same ethanol requirements.