The ethanol ‘blend wall’ could limit the U.S. fuel supply

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Michael Bastasch Contributor
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The high price of ethanol credits has energy industry experts saying the U.S. refining industry has hit the “blend wall,” which could limit the country’s fuel supply as refiners cut back production or export more fuel to stay in compliance with the federal Renewable Fuel Standard.

“That’s a very real concern that we have, that the RFS acts as a limitation on fuel supply,” Patrick Kelly, senior policy advisor at the American Petroleum Institute, told The Daily Caller News Foundation. “The blend wall is a 2013 problem. It gets worse as years go on. You can see it in the RIN price — we’re there now.”

“The increase in RIN prices — it increases the cost of manufacturing,” Kelly added. “We’re also concerned about the impact on supply. Any reduction in supply would also put upward pressure on prices.”

“RFS compliance options in an environment of short RIN supplies are limited and include a potential reduction in the production of gasoline and diesel fuel for domestic consumption and increased exports of gasoline and diesel fuel,” said Tim Hogan, motor fuels director at the American Fuel & Petrochemical Manufacturers, in his congressional testimony. “Lower volumes of transportation fuels in the U.S. will impact fuel costs and the economy.”

The Environmental Protection Agency requires a certain amount of renewable fuel to be blended into fuels on an annual basis and assigns Renewable Identification Numbers, or RINs, to track if refiners have met agency requirements. Refiners and importers can purchase RINs to satisfy the mandate.

However, demand for oil has been decreasing while government ethanol blending requirements have been increasing. Refiners are reluctant to blend fuels more than 10 percent ethanol because that’s the amount automakers say is safe to put into engines.

Bloomberg reports that the amount of ethanol refiners can blend into gasoline is effectively capped at 13.4 billion gallons for 2013 — 400 million gallons short of the EPA’s 13.8 billion gallon blending mandate.

“This systemic problem already is creating market uncertainty and has resulted in more than a 1000% increase in the price of ethanol RINs since the beginning of the year,” said Hogan. “The cost to obligated parties of purchasing these expensive RINs increases refinery operating costs and ultimately will disadvantage consumers.”

One option refiners have to comply with the law is to reduce gasoline and diesel production, which means consumers risk paying more at the pump — as much as 10 cents more, reports Bloomberg.

Prices at the pump could surge even higher as high priced ethanol credits make gas imports more expensive, which creates an incentive for refiners to export gas and avoid ethanol blending requirements.

“The EPA has the authority to revise the ethanol requirements, and some believe doing so would decrease the cost of gasoline by five to 10 cents a gallon,” said Benjamin Cole, communications director at the Institute for Energy Research. “This seems like a ‘no brainer’ since the original targets for ethanol blended into gasoline were based on increasing gasoline demand, not declining demand as we are seeing it today.”

High ethanol credit prices also give refiners an incentive to export more fuel abroad to avoid blending requirements.

“The additional cost of RINs provides even more incentive to export motor fuel,” reports the Oil Price Information Service. “One refiner that was all set to move some gasoline blendstock to Florida reportedly moved the cargo offshore, where the sale would not be impacted by the necessity to purchase some RINs.”

However, the ethanol industry argues that high RIN prices indicate the need for blending more ethanol into the fuel supply.

Reuters reports that the ethanol industry blames refiners for driving up gasoline and RIN prices due to their refusal to blend up to 15 percent ethanol per gallon of gas — E15 — which would relieve upward pressure on prices.

However, research by the oil and auto industry supported Coordinating Research Council found that E15 could endanger the fuel systems in millions of vehicles model year 2001 and newer, which could mean vehicles breaking down on the road.

The oil and gas industry has called for the EPA renewable fuels mandate to be completely repealed because it is unworkable and will force vehicles to use more harmful, ethanol-heavy fuels.

“We believe the Renewable Fuels Standard is unworkable and should be repealed,” said Robert Greco, downstream group director at API. “There is a fundamental flaw in the enabling statute so the only way to fix it is to scrap the law and start over if Congress believes such a program is necessary.”

Earlier this year, a federal court ruled that the EPA’s renewable fuel mandate and ruled that the agency exceeded its authority by requiring refiners to use cellulosic biofuels, which isn’t commercially available.

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