Ethanol, Fighting for Its Life, Gets a Temporary Reprieve

- by Matthew Philips, Novem­ber 24, 2014, Bloomberg Busi­ness­week

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.

To accom­mo­date the man­dates, more gaso­line would have to be sold using high­er blends, such as E15, which con­tains up to 15 per­cent ethanol. As of last year, how­ev­er, only about 60 gas sta­tions in the U.S. car­ried E15. In response last fall, the EPA pro­posed cut­ting the 2014 man­date from 18.1 bil­lion to 15.2 bil­lion gal­lons. Although the rule still isn’t final­ized, the pro­pos­al had the same chill­ing effect of low­er­ing the amount of ethanol blend­ed into the gaso­line supply.

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.

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.”

For the past year the ethanol indus­try has essen­tial­ly been fight­ing for its life, engaged in a deep lob­by­ing effort to per­suade the White House not to change the method­ol­o­gy of the man­date includ­ed in the Renew­able Fuel Stan­dard law. Mean­while, oil com­pa­nies and refin­ers have been push­ing a change that would gut the entire pro­gram by allow­ing them basi­cal­ly to side­step the man­dates altogether.

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.

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.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.