Dangerous Ethanol Mandates

Brian Hicks

Written By Brian Hicks

Posted October 14, 2013

Ethanol is one area where the oil industry and some environmental groups can share common ground. It sounds odd on the surface, but hear me out.

Environmentalists oppose an increase in ethanol usage because of the strain on our food supply and the devastating effects it has on wetlands and other sensitive areas. Ethanol comprises 40 percent of the national corn supply – an enormous percentage for a fuel source that is used sparingly around the country.

cornFor ethanol that is produced through natural gas, emissions are 33 percent higher than gasoline, and for ethanol from coal, emissions are 66 percent higher, according to the Environmental Working Group. And ethanol production is reducing food security in developing nations, since corn crops are being used for fuel instead of feeding the hungry.

People who work in the refining industry will tell you about the frustration in using a product with minuscule demand and high costs. The so-called E10 requirement, which mandates that gasoline must be blended with 10 percent ethanol, continues to play a role in rising gasoline prices.

And although there remain advocates of ethanol, including corn farmers who rely on government subsides, ethanol is facing growing rejection.

The government must have heard these complaints loud and clear, since there are proposals to reduce the amount of required ethanol at refineries.

According to a leaked proposal, the EPA may cut its ethanol mandate from 18.15 billion gallons in 2014 to 15.21 billion gallons. Furthermore, a cut would apply this year in the form of a 13 billion gallon corn ethanol requirement, down from 13.8 billion gallons. And because of a shortage of production fuel, the EPA will also be cutting its cellulosic fuels from 1.75 billion gallons to 23 million gallons, Bloomberg reports.

Some would argue that these lowered mandates do not go far enough, but they will certainly come as a relief to refiners and consumers.

Ethanol Problems

Many are unaware of the damage that the E10 mandate is doing to the economy, especially in the area of ethanol credits. These credits went from seven cents to over $1.40 this year – forcing refiners to raise gasoline prices to compensate for higher costs.

The mandate also forces refiners to rely on pricier imports – another factor that plays a role in rising gasoline prices.

The EPA wants to eventually shift to E15, but this is simply not feasible, since research has shown that many older model vehicles cannot accept such a high amount.

When refiners are required to either sell fuel blends higher than E10 or export gasoline to meet the requirements, this is known as the blend wall. Refiners are getting close to this level, as rising mandates are pushing them to increase the ethanol content in gasoline.

Research has shown that 95 percent of cars cannot handle ethanol levels above E10. And the scary part is that the EPA will continue pushing these ethanol requirements into an eventual E20. The EPA’s overarching goal is to incorporate an annual 36 billion gallons of biofuels into cars by 2022.

The general consensus is that E15 will be fine for cars manufactured after 2001. But what about those who purchase cars before that year? And how will other cars react to higher amounts of ethanol?

Many stations do not have the infrastructure to accept higher amounts of ethanol, and station owners do want to want to draw public ire if it is discovered that their fuel is the culprit behind damaged vehicles.

The mandate itself is problematic, as it forces the oil market to adopt a product that is not popular among buyers and consumers.

When the Renewable Fuel Standard was introduced in 2007, it was assumed that gasoline consumption would rise in future years. The opposite proved to be true due to economic decline.

In 2007, 2014 demand was expected to rise to 154 billion barrels. Now, it is only expected to reach 133 billion.

Will the Ethanol Mandate Be Removed?

I predict the ethanol mandate will be lowered one day, but a repeal will not happen anytime soon.

Efforts are already underway in lowering the E10 requirements by lawmakers. This would be done through adding amendments to the RFS. There is already a proposal to place a temporary cap on the E10 requirements for two or three years.

This is not good news for ethanol investors, but it is better news if you have a stake in the oil industry. If the ethanol mandate is removed, everyone will be a winner in their own way.

Environmentalists will get the satisfaction of seeing sensitive lands preserved, consumers will get some measure of relief at the pump, and energy insiders will be able to conduct business with less government interference.

For supporters of ethanol, the industry may be on shaky ground in the future, and it is cause for concern – especially as other forms of biofuels gain traction.

On the plus side, the industry is seeing record corn crops this year, but it means little when gasoline consumption is down.

The state of ethanol is in good shape, but there is little sense in forcing this form of biofuel down our throats, since it only hurts both the energy and biofuel industries at once.

If you’re an investor in oil, the only thing you can do is cross your fingers and hope there will be further cuts in the future.


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