Q: What can cool the ethanol market?

A: The EPA

Thanks to the inter­ven­tion of the Envi­ron­men­tal Pro­tec­tion Agency (EPA), the tor­rid mar­ket for ethanol credits—a linch­pin of efforts to inject more corn-based fuel into the U.S. gaso­line supply—may final­ly be set to cool, help­ing to con­tain prices at the pump.

On Fri­day, the agency bowed to intense pres­sure and cut future bio­fu­el man­dates across the board. By effec­tive­ly cap­ping the gas-to-ethanol mix at its cur­rent lev­el of 90–10 per­cent, the EPA helped refin­ers avoid run­ning into a “blend wall”—the point at which refin­ers would have been adding more bio­fu­el to gaso­line than crit­ics con­tend most auto­mo­biles are mechan­i­cal­ly capa­ble of taking.

(Read more: EPA pro­pos­es reduc­ing ethanol mandate)

Gold­man Sachs point­ed out that the cap has an added benefit—reining in the volatile mar­ket for renew­able cred­its, which had made it cost­ly for gas pro­duc­ers to com­ply with require­ments. Ear­li­er this year, the mar­ket for Renew­able Iden­ti­fi­ca­tion Num­bers (RINs)—the cred­its refin­ers use to com­ply with bio­fu­el guidelines—surged to a record high, help­ing to push up retail gaso­line prices.

The EPA’s shift cre­ates “a new frame­work for set­ting the man­dates where it active­ly man­ages annu­al tar­gets by tak­ing into account the capa­bil­i­ty to pro­duce and blend bio­fu­el, cap­ping the upside to RIN prices,” Gold­man wrote in a research note on Mon­day. If the pro­pos­als pass muster dur­ing the 60-day com­ment peri­od, the new frame­work would push prices down even fur­ther in the long term, the bank said.

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Expect­ing pres­sure on ethanol prices: Pro

For the first time the EPA has shrunk the ethanol man­date. Andy Lipow, Lipow Oil Asso­ciates, thinks it is a big win for big oil.

In some cas­es, low­er ethanol guide­lines and less biodiesel pro­duc­tion “implies sharply low­er” RIN prices, the firm said, adding that 2014 ethanol tar­gets “would be bear­ish [for] RIN prices.” Still, Gold­man added that “uncer­tain­ty on whether the EPA’s method­ol­o­gy will with­stand chal­lenges will like­ly main­tain RIN prices well above their expect­ed low­er fair val­ue until at least mid-2014.”

For months, refin­ers have bris­tled at the man­date, say­ing it would force them to pass high­er costs along to con­sumers in the form of prici­er gas. A bleak study cit­ed by the Amer­i­can Petro­le­um Insti­tute, the oil and gas indus­try’s lob­by­ing arm, said if left unchecked, man­dates could lead to “severe” rationing, send gaso­line surg­ing by 30 per­cent in 2015 and shave bil­lions off eco­nom­ic growth and dis­pos­able income.

(Read more: Ethanol man­date, ‘blend wall’ looms large for refin­ers)

Mean­while, the auto indus­try cheered the move, argu­ing that 90 per­cent of the U.S. car fleet can­not han­dle a high­er ethanol mix.

“The EPA’s pro­pos­al to decrease ethanol require­ments will help dri­vers by pre­vent­ing a surge in gas prices or the pre­ma­ture expan­sion of E15 gaso­line sales,” said Bob Dar­bel­net, pres­i­dent and CEO of AAA, in a state­ment. E15 is a ref­er­ence to a mix that is 15 per­cent ethanol and 85 per­cent gasoline.

“While we would like to increase the use of alter­na­tive fuels, it is a plain fact that the Renew­able Fuels Stan­dard­’s orig­i­nal tar­gets are unreach­able with­out putting motorists and their vehi­cles at risk,” Dar­bel­net added.

The relax­ation of man­dates was a set­back for corn pro­duc­ers and renew­able fuel advo­cates, most of whom cham­pi­oned an even­tu­al rise of the gas/ethanol bench­mark to 15 per­cent, from the cur­rent 10 per­cent. In reac­tion to the EPA’s move, the Amer­i­can Coali­tion for Ethanol blast­ed the relaxed stan­dard as a bow to the oil and gas lobby.

—By CNBC’s Javier E. David