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By Robert Rapier on Mar 10, 2017 with 4 responses

The Ethanol Industry Braces For Impact

Last week the Renewable Fuels Association (RFA) reported that President Trump is preparing to direct the Environmental Protection Agency (EPA) to make a big change to the country’s Renewable Fuel Standard (RFS). The change is one that has been long sought by refiners, but it has been resisted by the country’s biofuel industry. Today I will attempt to explain what it all means.

Briefly, the U.S. has certain biofuel mandates in place. To track compliance, renewable identification numbers (“RINs”) are assigned to biofuels as they pass through the supply chain. Ultimately, those defined as “obligated parties” are required to submit their quota of RINs to the EPA to demonstrate compliance.

Compliance can be met by purchasing the fuel with the associated RIN, or simply purchasing the RINs (which can be separated from the associated biofuel). This means that there is a value for RINs that has the effect of offsetting some of the production cost for the biofuel producer. This system subsidizes biofuels at the expense of both the obligated parties and the final consumer.

Most oil companies and refiners loathe biofuel mandates, but this particular issue revolves around the definition of “obligated party.” Valero is the largest refiner in the U.S. and an obligated party under the current system. Even though the company produces some of its own ethanol, RIN compliance cost the company $750 million in 2016. To put that number in perspective, Valero reported 2016 adjusted net income attributable to Valero stockholders of $1.7 billion. 

Valero and other refiners want to redefine “obligated party” to mean the entity that holds title to the fuel immediately prior to sale from the bulk transfer/terminal system to a wholesaler, retailer or ultimate consumer. These are the same entities required to report federal excise tax liability for the gasoline or diesel they sell. (See Valero’s petition for the rule change here).

Valero’s primary objection to being an obligated party is that refiners are not (necessarily) the final blenders of fuel, and therefore they may have no direct impact on how much ethanol gets blended into the fuel. The entity that actually blends the fuel and sells it into the marketplace has the greatest power to actually meet the obligation, and they should therefore be obligated, and thus incentivized, to do so. Valero also asserts that such a change would substantially reduce the opportunity for RIN fraud and RIN speculation because the parties with the obligations would be those who separate the RINs from the fuel and must turn them in.

Who opposes such a move? The fuel marketers and retailers, who in many cases are making profits by selling RINs back to the refiners. Then there are various renewable fuel groups. I think their primary fear is that putting that large compliance obligation on smaller businesses (as opposed to multi-billion refiners) could cause a backlash against the entire idea of renewable fuel mandates. It would open a can of worms they would rather leave closed.

So what’s going to happen? The White House denied that such an order is pending, but Carl Icahn has been a vocal critic of the current system. He is the majority owner of refiner CVR Energy. More importantly, he is advising President Trump on the issue.

Expect the change to happen. It’s likely to hurt ethanol companies in the long run and should improve the fortunes of some refiners at the expense of marketers and retailers. Ultimately, the change is going to put the spotlight on the nation’s biofuel mandates, and it may just be the tip of the iceberg.

Link to Original Article: The Ethanol Industry Braces For Impact

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  1. By Ben G on March 11, 2017 at 9:58 am

    Let’s hope to God this iceberg, and the Titanic that is today’s ethanol industry, finally have a rendezvous in the cornfields of America’s heartland. Only then, will limited resources be much more efficiently applied toward the market-directed improvement of sustainable food and fuel supply chains that serve the national interests.

    Just imagine the improvements that might have been made if a decent slice of the $20+BB in biofuels subsidies misapplied for the last two decades had been used for market-based innovations aimed at modernizing and diversifying local economies. Ah, but if constructive change involves getting the right (efficient) thing done in Washington, well, let’s not place too many chips on that particular number!

    Ben G

    • By Alex Johnson on March 16, 2017 at 5:05 pm

      Just imagine if the $100+BB oil companies get in subsidies every year were applied in the same way…

      Also, I’d say our food supply is pretty sustainable as it sits right now. What improvements need to be made? Do you want it to be cheaper? We already have the cheapest food in the world.

  2. By Forrest Butter on March 16, 2017 at 6:06 am

    The ethanol industry appears to split on the benefit or negatives. Some say it would be o.k. and lead to more ethanol blends quicker. Others just don’t want change and think the exercise would just destabilize what is going on. I think the original intent was directed to refiners obligation as they could and have refined custom blends of gasoline for ethanol. RBOB is one that cost less per gallon for the industry.This cheaper base stock is inferior fuel, but 10% ethanol brings it back to spec. Since ethanol is cheaper per gallon and the blend stock is cheaper, the fuel is saving motoring public adds up to some major money. The ethanol blend stock does reduce need for the more toxic benzene, toluene, etc.
    The refining of crude oil is complicated and varied as the base stock and capabilities of the particular equipment. These enterprises make money by utilizing every ounce of the base stock and prefer to use the content upon maximum return on investment. This is black box stuff and held close to the vest secrecy as the competitors would like to know more. Also, the gov’t and consumers would like to know the truth upon costs of refining to healthier or less harmful to environment fuels, but if your process relies or is more profitable dumping benzine to gasoline you don’t want to advertise that fact. Also, you would hate ethanol that mucks up the best value for your petrol refining returns. The EPA really is only testing for the most basic of chemistry profiles. They can’t get to involved with petrol fuel as the base stock has hundreds of chemical combinations that vary upon source and each refinery is different. Compare that quality control to knowing ethanol chemistry is almost food grade quality, even the CO2 process emission.

  3. By Benjamin Cole on March 23, 2017 at 11:33 pm

    Egads. It is intelligent stories like this make anyone wonder why we get away from free markets.

    And if anyone thinks the GOP likes free markets…read this story. See who the corn states are tight with.

    Rural America is a vast Pink-o Wonderland.

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