Bloomberg News

Ethanol Loses as Gas-Price Fears Prompt Reevaluation From Obama

November 16, 2013

North Dakota Ethanol Plant

Renewable fuel supporters say the oil industry is holding back investments in the infrastructure to deliver higher blends of ethanol because it wants to preserve its market share. Photographer: Daniel Acker/Bloomberg

For months, lobbyists for refiners such as Valero Corp. (VLO:US) and Exxon Mobil Corp. (XOM:US) have warned that a U.S. law requiring increased use of ethanol would result in a mandate to add more of the fuel than they could safely blend into gasoline.

While that claim was mocked by executives at renewable fuel producers such as Poet LLC and a joint venture of BP Plc (BP/) and DuPont Co. (DD:US), yesterday the refiners got their way.

The so-called “blend wall” was cited by the Environmental Protection Agency as the key reason to propose the first cut in requirements for renewable fuels since they were mandated by a 2007 law.

“EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies,” Bob Dinneen, the president of the Renewable Fuels Association, which represents ethanol makers such as Abengoa SA. (ABG)

Refiners, fast-food restaurants, motorboat makers and chicken farmers have all pushed the EPA to scale back the ethanol mandate, saying it risks ruining engines by forcing more ethanol to be blended into gasoline and is acting to push up demand for corn. Gasoline demand is falling, and rising requirements for renewable fuels are ramping up the percentage of those fuels in the total mix.

The EPA proposal to require 15 billion to 15.52 billion gallons of renewable fuels such as corn ethanol and biodiesel in 2014 was a rare victory for the oil industry under President Barack Obama, and one the biofuel industry said could set back investments in their plants. That proposal compares with 18.15 billion gallons set in the legislation, making it the first time the legal mandate would be cut after years of annual increases designed to boost the industry.

Blend Wall

“EPA’s recognition of the blend wall and the potential adverse effects on consumers is a welcome step,” Charles Drevna, the president of the American Fuel & Petrochemical Manufacturers, which represents refiners such as Valero and Tesoro Corp. (TSO:US), said in a statement. The renewable fuels legislation “requires quantities of biofuel to be consumed that are well beyond the technical limitations of many engines in service today.”

Valero rose 16 cents yesterday to $43 at 4 p.m. in New York Stock Exchange trading, while Archer-Daniels-Midland Co. (ADM:US), which processes corn and other agricultural products, dropped $1.44 to $40.56, its biggest decline since Aug. 26. Prices of soybeans, used to make biodiesel, fell the most in six weeks, and corn futures dropped 1.4 percent to $4.305 a bushel in Chicago.

Renewable fuel supporters say the oil industry is holding back investments in the infrastructure to deliver higher blends of ethanol because it wants to preserve its market share.

‘Flexible-Fuel Vehicles’

“Part of our challenge is, the oil industry has done a pretty good job of making it harder to access higher blends and making it harder to take advantage of all the flexible-fuel vehicles that are on the road today,” Agriculture Secretary Tom Vilsack said this week.

Within the range of values it provided, the EPA listed specific volume requirements it was proposing: 15.21 billion gallons for renewable fuel generally and 2.2 billion for advanced biofuels, such as biodiesel. A final rule is due in the first quarter of 2014, after refiners and ethanol makers weigh in.

The EPA also proposed cutting the mandate for biodiesel and cellulosic products to as much as 2.5 billion gallons, compared to the 3.75 billion gallon target in the legislation.

By cutting back on quotas for those so-called “next generation” fuels, producers said that EPA risked killing investments necessary to get fuel from switchgrass, corn husks or algae.

‘Hurt Efforts’

“The numbers released today will hurt efforts to continue to expand and grow this cutting edge technology, create new American jobs and further American energy independence,” Hugh Welsh, president in North America for Royal DSM NV, a Heerlen, Netherlands-based company that’s building a U.S. plant to make fuel from corn cobs and husks.

EPA officials say they are listening to those concerns and have pledged to preserve a market for cutting-edge renewable fuels.

In its rule yesterday, the agency stuck to that estimate, saying it forecasts that 12.95 billion to 13.09 billion gallons of ethanol could be consumed in the U.S. in 2014, which would be below the 13.8 billion gallons it mandated this year.

Refiners, which have resisted the corn ethanol mandate, haven’t fought so hard against biodiesel, as it doesn’t present the same constraints as ethanol. Still, the cut in their use as proposed by EPA was also panned by that industry.

“This proposal, if it becomes final, would create a shrinking market, eliminate thousands of jobs and likely cause biodiesel plants to close across the country,” Anne Steckel, vice president of the National Biodiesel Board, said. “It also sends a terrible signal to investors and entrepreneurs.”

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net; Mario Parker in Chicago at mparker22@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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Companies Mentioned

  • VLO
    (Valero Energy Corp)
    • $56.55 USD
    • 0.09
    • 0.16%
  • XOM
    (Exxon Mobil Corp)
    • $96.72 USD
    • -0.06
    • -0.06%
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