How Much is Too Much Ethanol?

The heat is on for ethanol, as the oil industry lobbies the Obama administration to lower the ethanol-gas mandate for 2014, but the folks in Iowa, for one, want to keep it because it's one of the leading producers of ethanol.  

The Environmental Protection Agency (EPA) will take the next three months to consider a petition from the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers, who want to see the ethanol mandate dip below 10% for 2014.

As it stands, the Renewable Fuel Standard (RFS) requires refiners to buy alternative fuels to meet a target of 18.15 gallons of renewable fuels blended with gasoline in 2014. The oil industry is hoping to see this lowered to 14.8 billion gallons.

So far they haven't had any luck. This is the third time they have petitioned to lower the mandate, and they may be rejected for a third time.

Naturally, the Renewable Fuel Standard means different things for different sectors. While the oil industry is losing out, producers of ethanol and growers of crops for biofuels are enjoying a bit of a boom.

For the oil industry, the problem is that the RFS was devised back in 2005, when gas demand predictions were expected to be different. Now we have better fuel economy and demand for gas that is increasing slower than expected. But it's not the oil industry alone that is suffering under the ethanol mandate. Poultry companies are going bankrupt due to rising prices of feedstock as crops are diverted to ethanol. The state of Minnesota is said to be having a tough time because its revenue relies strongly on chicken farming and egg production, which is getting more and more expensive.

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The state of Iowa shows us the reverse of this equation. Here, corn ethanol plants are making money and providing jobs-and times are good.

There are two sides to every story, and we need a renewable fuel standard that is progressive. From the prospective of biofuels companies, the standard keeps the oil industry from monopolizing the fuel market. The problem with the ethanol mandate is a simple one-it's based on predictions that were short of the mark, and it should be lowered, but not drastically.

The oil industry's petition is being considered, strongly, and this time around they may win, though perhaps not with the extent of reductions they are seeking. The EPA has already conceded that the standard's targets aren't ideal. At issue is the "blend wall"-the wall the market will hit when it has more biofuels than can be blended with gas. To this end, the EPA has already hinted that it may lower the volumes for 2014, though by how much remains undecided.  

The EPA is talking about introducing more "flexibility" in the process to allow it to reduce total renewable volume requirements for 2014. It is also prepared to allow for more flexibility in terms of compliance deadlines.

A change is likely in store, and the oil industry is likely to see a small victory in the next few months, but this certainly will not be the end of the ethanol mandate-just a tweaking of the targets on the way to the end goal.

By. Charles Kennedy of Oilprice.com