October 11, 2013 12:12 am

US eyes cutting ethanol usage

The US would ratchet back its ethanol consumption mandate for the first time under a proposal that would ease costs for oil refiners and cool demand for farmers’ corn.

The White House is considering a plan to require 15.21bn gallons of ethanol and biodiesel to be blended into motor fuels next year, well below the 18.15bn mandate dictated by Congress.

The proposal, outlined in draft documents seen by the Financial Times, comes almost six years after lawmakers passed the mandate in an attempt to wean the US from foreign oil and back income for corn belt states.

This policy crashed into the unexpected reality of weaker fuel consumption and an oil industry reluctant to sell petrol containing more than 10 per cent ethanol, making the targets unachievable in a problem known as the “blend wall”.

The Environmental Protection Agency’s preferred option would hit not only Brazilian sugarcane growers, who export ethanol to the US, but for the first time cut required volumes of ethanol refined from corn. Less than 13bn gallons of corn ethanol would have to be sold under the draft proposal, below levels in force in the past two years and well below the 14.4bn statutory mandate for 2014.

This would hit US ethanol refiners, such as Archer Daniels Midland and Poet as well as the farmers who sell them 35 per cent of the nation’s corn crop.

EPA has sent its draft proposal to the White House Office of Management and Budget for review and has not released it for public comment. The agency, largely closed owing to the federal government shutdown, did not respond to requests for comment.

A September 6 document indicates EPA plans to invoke powers to declare “inadequate domestic supply” as a way to justify the deviation from the congressional mandate. The Renewable Fuels Association, a biofuels lobby group, said this would be “patently unlawful”.

“There is no basis to suggest that the strict criteria for a general waiver are met today,” said Bob Dinneen, RFA president.

The renewable fuel and oil sectors have been at war with one another over the biofuels mandate, even as fuel retailers need some ethanol to meet emissions and octane requirements.

Oil refiners’ shares responded positively to reports of the proposal. Valero, which also runs ethanol plants, closed 4.7 per cent higher, while HollyFrontier was up 6.1 per cent, Marathon was up 5.2 per cent and Phillips 66 was up 2.9 per cent.

The American Petroleum Institute argues that the law’s requirements should be waived for next year on the grounds that because of the limit to ethanol use set by the blend wall, the mandate would cause “severe economic harm,” including “significant increases in the cost of fuel and substantial fuel supply shortages in the United States”.

Patrick Kelly of the API said if the reported EPA proposals were confirmed, “directionally they’re doing the right thing, although we just think they could have gone a little further”.

Jason Bordoff of Columbia University’s Center on Global Energy Policy said that if the figures were confirmed, he would expect a sharp fall in the price of the biofuels credits, known as Renewable Identification Numbers, used by fuel suppliers to meet their regulatory obligations.

“This potential reduction is more than what many in the market were expecting,” he said. “Industry could comply with these renewable fuel obligations without the incentive of a high RIN price to build out E85 infrastructure or produce more biomass-based diesel.”

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