Lobby groups representing the U.S. refining industry and oil companies slammed a Trump administration proposal to allow blends of gasoline containing 15% ethanol, known as E15, in the U.S. motor fuel pool year-round.
President Donald Trump on Oct. 9 directed the U.S. Environmental Protection Agency to draft rules allowing E15 to be sold on a year-round basis, a change from current policy that only allows its sale during winter months because of concerns that its evaporation in hot weather contributes to smog pollution.
While the deal could help alleviate some of the challenges refiners face from the requirement to blend increasing volumes of biofuels into the transportation fuels they produce for the U.S. market, the policy change could reduce overall domestic sales of their gasoline production.
"Overall we see this news as a minor negative for US refiners as the impact of potential lost gasoline demand is more significant than small savings on [biofuel blending credit costs]," Tudor, Pickering, Holt & Co. analyst Matthew Blair wrote in an Oct. 10 report.
"The President's proposal to waive the rules for E15 is unlawful and could actually make the problems of the Renewable Fuel Standard worse," American Fuel and Petrochemical Manufacturers President and CEO Chet Thompson said Oct. 9. "The President has promised to broker a deal to reform the [Renewable Fuels Standard program] that works for all stakeholders. This isn't it."
While the EPA approved in 2011 the use of E15 in all light-duty vehicles built in 2001 or later, or approximately 90% of those on the road today, the American Petroleum Institute warned that three-quarters of vehicles on American roads are incompatible with higher-ethanol fuel, and some automakers have said using E15 could potentially void vehicle warranties. Blair called attention to the legal risk of selling E15 as an obstacle to its wider adoption, noting Ford and GM have said to only use E15 in vehicles from the 2012 model year and newer.
"[The] EPA has previously stated that it does not have the legal authority to grant the E15 waiver," API President and CEO Mike Sommers said Oct. 9. "The industry plans to aggressively pursue all available legal remedies against this waiver."
The renewable fuel standard program requires U.S. refiners and importers to blend biofuels such as ethanol into the transportation fuels they produce or import. Obligated parties that cannot meet the volume requirements set annually by the U.S. EPA must purchase renewable identification numbers, or RINs, in order to meet their compliance obligations.
Currently, regulations limit the amount of ethanol blended into gasoline to 10% during the summer months.
The refining industry has complained that an ethanol blend wall — or a maximum amount of ethanol that the gasoline market can absorb given market, technical and infrastructure barriers — contributed to rising RINs prices by forcing refiners to purchase RINs in order to meet compliance obligations.
Rather than a higher cap on the proportion of ethanol in the U.S. gasoline pool, the industry sought compliance waivers from the EPA in order to lower the cost of biofuel blending credits.
In January, PES Holdings blamed its bankruptcy on the renewable fuel standard program. In April, a federal bankruptcy judge approved a settlement where the EPA forgave a portion of PES' RINs obligations.
U.S. refiners outlined hundreds of millions of dollars in savings from that settlement as well as other compliance waivers granted by the EPA under Scott Pruitt's leadership to small refineries.
The ethanol industry, which on Oct. 9 expressed its approval of the Trump administration's proposal, had challenged those biofuel blending waivers in federal court.
"Securing fair market access for E15 and other higher blends has been our top regulatory priority for several years, and we are pleased that the first official step in this process is being taken," Renewable Fuels Association President Geoff Cooper said.
The RFA noted E15 is currently available at more than 1,300 retail stations in 29 states, and that it expects removing the summertime E15 ban will lead to the "rapid expansion" of its availability nationwide.
Blair said E15 accounts for a "miniscule" part of the total retail fuel market but suggested more gas stations could sell it to lure customers.
"Since ethanol only has about [two-thirds] the energy content of gasoline, it offers less fuel economy and thus should sell at a lower price," Blair wrote in and Oct. 10 note. "Fuel stations generally make at least [two-thirds] of their margin from in-store sales, and thus all things equal, a lower price at the pump may attract more customers into the store."
Blair said the current average U.S. ethanol blend rate is 10.2%.
"While we expect E15 to gain some acceptance, we would be surprised if these blend rates are above 10.7% in 2020," Blair said. "Nevertheless, this would still represent an incremental 0.5% headwind to gasoline demand over the next two years. While additional ethanol blending would increase RIN supply, RIN prices are currently in the 12 [cent per gallon] range, way below 74 [cents per gallon] last year at this time."