US Ethanol Biofuels Mix Hits The Oil ‘Blendwall’

http://www.ft.com/cms/s/0/3dad8ae0-04fc-11e3-9ffd-00144feab7de.html#ixzz2cJfyChEp August 14, 2013 6:31 pm US ethanol biofuels mix hits the oil ‘blendwall’ By Gregory Meyer in New York In the slow-motion collision between US biofuels policy and the “blendwall”, it looks like the wall will be left standing. The blendwall is shorthand for the maximum amount of ethanol that the US oil industry will mix into petrol. Given demand constraints in the US, this is a tad more than 13bn gallons this year. But the federal Renewable Fuel Standard (RFS) requires 13.8bn gallons of corn-based ethanol to be blended this year, and even more when “advanced” biofuels are counted. Next year the law dictates a further rise. So policy is crashing into the reality of the blendwall. Congress has failed to address the problem, so the White House stepped in last week. In obscure bureaucratic language, the Environmental Protection Agency invoked powers to signal a reduction in the mandate next year. The move has implications for commodity markets from corn to petrol. It could reverberate not only in US farm states such as Iowa and Nebraska, but Brazil and Europe as they respectively export ethanol and petrol to the US. The US Energy Independence and Security Act of 2007 sharply increased how much ethanol fuel companies must blend into petrol each year. The law was passed just before the financial crisis and a shift towards more efficient cars. The increase could have been achieved in spite of weaker petrol demand if fuel companies had increased the ratio of ethanol in each gallon of petrol. But they have in most cases refused to go beyond 10 per cent, citing potential damage to engines. The EPA in past years rebuffed concerns about the blendwall. But last week it acknowledged that the maths did not work. For 2014, “the ability of the market to consume ethanol in higher blends . . . is highly constrained as a result of infrastructure- and market-related factors”, the agency said. It plans to reduce renewable fuel volume requirements in its rules for next year. Scott Irwin, a University of Illinois agricultural economist, called the move a “fairly significant strategic defeat for the ethanol and corn interests”, as their dreams of higher ethanol blend levels “are unlikely to ever be fulfilled”. The shift had an immediate effect on the volatile market for credits that fuel companies can use to comply with blending requirements. “Renewable identification numbers,” or RINs as the credits are known, have plunged 30 per cent since the EPA announcement. The EPA noted it would examine “advanced” biofuels requirements for fuels not distilled from corn. This could trim not only experimental biofuels refined from things like wood waste, but sugarcane ethanol imported from Brazil. Joel Velasco, adviser to Unica, the Brazilian sugar industry group, says: “How much? That’s the million-dollar question, or the billion-gallon question. That’s what the concern is about: how much are they going to have to reduce?” If Brazilian imports take a hit it could be slightly bullish for corn prices in the short term, Prof Irwin says. That is because corn ethanol refiners such as Archer Daniels Midland and Valero Energy would see less foreign competition. The sharp fall of the real, the Brazilian currency, and a rebound in the country’s sugar crop have made its ethanol exports more attractive. But even if advanced biofuels were eliminated the mandate would still require 14.4bn gallons of corn-based ethanol to blend. As the US Energy Information Administration projects 133bn gallons in total motor gasoline demand next year, this surpasses the 13.3bn gallons of ethanol needed under the 10 per cent blending ratio. Bob Dinneen, head of the US Renewable Fuels Association trade group, draws a line at 14.4bn gallons, dismissing as “nonsense” the idea it could not be met. “The narrative that the oil companies are suggesting that the RFS needs to be reduced to the level of the blendwall ignores the fact that one of the purposes was to move beyond 10 per cent ethanol in the motor fuel market,” he says. The oil industry is taking the opposite tack: this week it petitioned EPA to cut the ethanol mandate to below 10 per cent of petrol demand, warning the alternative will be “significant increases in the cost of fuel and substantial fuel supply shortages in the US”. As the political drama plays out, expect more sharp market moves ahead. Taylor Scott International