U.S. Boost of Biofuels Pleases Neither Refiners Nor Growers

(Bloomberg) — The U.S. on Monday ordered a slight increase

in the level of renewable fuels that must be blended with

gasoline. And neither biofuel nor oil producers seem

particularly happy about it.

Fuel suppliers will have to mix 16.93 billion gallons of

corn-based ethanol and other renewable fuels into gasoline this

year and 18.11 billion gallons in 2016, the U.S. Environmental

Protection Agency said Monday.

The mandates are above levels proposed by the agency in May

but are well below statutory targets refiners have called

unrealistic.

“With today’s final rule, and as Congress intended, EPA is

establishing volumes that go beyond historic levels and grow the

amount of biofuel in the market over time,” Janet McCabe, the

acting assistant administrator for EPA’s Office of Air and

Radiation, told reporters. She said the final rule will

“provide for ambitious, achievable growth.”

The mandates were authorized by Congress 10 years ago in a

program that requires steadily escalating volumes of biofuels to

be blended into the country’s gasoline and diesel fuels. The

law, designed to shrink the nation’s dependence on foreign crude

and curb greenhouse-gas emissions, has pitted oil companies

including Chevron Corp. and Exxon Mobil Corp., which oppose

using more biofuels, against farmers in the corn-rich Midwest

who’ve argued for higher amounts.

Ethanol Rose

The EPA’s final rule — delivered on the same day President

Barack Obama made an appeal to international climate negotiators

in France — could revive a congressional debate over the

Renewable Fuel Standard and spill over into the presidential

campaign, as candidates stump in Iowa and other corn-belt

states.

U.S. ethanol for January delivery rose for the first time

in three trading days on the announcement, gaining 0.5 percent

to $1.485 a gallon.

Pacific Ethanol Inc., a U.S. West Coast producer, surged 21

percent to $4.99, in its steepest one-day gain since March, in

Nasdaq composite trading. Green Plains Inc., the fourth-biggest

U.S. Ethanol producer, rose $1.13, or 5 percent, to $23.69 on

the Nasdaq, the highest since July 29.

Refiners were down modestly; the industrywide average fell

0.98 percent.

Last year, the EPA decided to put off setting 2014 quotas,

saying it would issue rules for 2014, 2015 and 2016 this year.

In May, it proposed targets that fell short of levels mandated

in the law — raising the ire of renewable fuel advocates and

setting off a flurry of lobbying in Washington.

Retroactive 2014

The EPA’s total renewable target released Monday for 2014 –

– 18.15 billion gallons — essentially tracked actual gasoline

demand because they were set retroactively.

The announcement represents the first time the EPA has

formally waived the statutory mandates for conventional corn-based ethanol in response to industry concerns that Congress’

targets would push them past a 10 percent blend wall — the

amount acceptable in all cars and trucks. Federal laws allow the

EPA to lower the volume requirements if production falls below

expectations.

But McCabe stressed that regulators were seeking to balance

Congress’ desire to boost next-generation renewable fuels,

particularly those made from non-edible plant material, while

acknowledging marketplace realities.

The intent of Congress to increase renewable fuels has to

be balanced with “the real-world circumstances that have

affected progress toward those goals,” McCabe said.

Ethanol now accounts for about 10 percent of gasoline

consumption. While fuel suppliers have warned that adding more

into the mix would damage car engines, the EPA has allowed

blends of as much as 15 percent ethanol for cars made after

2001.

Oil Industry

Oil industry leaders praised the EPA for using its waiver

authority to lower ethanol mandates but said the agency didn’t

go far enough. The final targets for 2015 and 2016 are beyond

the American Petroleum Institute’s request to cap the total

ethanol mandate at 9.7 percent of gasoline demand, which would

provide a buffer below the 10 percent blend accepted in all cars

and trucks to accommodate sales of ethanol-free gasoline.

“EPA’s final rule relies on unrealistic increases in sales

of higher ethanol fuel blends despite the fact that most cars

cannot use them,” said API President Jack Gerard.

The EPA justified its increase partly on robust predictions

that higher ethanol blends such as E15 and E85 would gain

traction and there would be scant demand for ethanol-free

gasoline prized by boaters and some equipment owners.

Marine Engines

While the EPA predicted recreational marine engines would

consume 124 million gallons of ethanol-free gasoline next year,

the lead refining industry trade group expects some 7.5 billion

gallons of it to be sold. The discrepancy shows the EPA’s

targets are built on “unrealistic assumptions,” said Chet

Thompson, president of the American Fuel and Petrochemical

Manufacturers.

Tesoro Corp., an oil refiner, dropped $2.05, or 1.8

percent, to $115.17 on the New York Stock Exchange, the biggest

one-day decline since Nov. 12. Valero Energy Corp., slipped

$1.08, or 1.5 percent, to $71.86, also the steepest decline

since Nov. 12.

Corn Growers

The announcement was a blow to corn growers, who count on

robust annual biofuel targets to drive demand for their crops.

Ethanol is projected to consume 38 percent of this year’s corn

crop.

Monte Shaw, executive director of the Iowa Renewable Fuels

Association, called the EPA’s announcement “a gut punch for

consumers and farmers.”

Biofuel producers had implored the Obama administration to

keep targets at the congressionally mandated levels, including a

ceiling for conventional corn-based ethanol.

By departing down from those statutory targets, “the oil

industry is being rewarded for its unwillingness to follow the

law and invest in infrastructure to move toward cleaner

renewable fuel, which sets a dangerous precedent for the future

of the program” said Growth Energy, a biofuel producer group,

in a statement.

Under congressional targets, the U.S. was to use 20.5

billion gallons of renewable fuels this year, including 15

billion gallons of ethanol derived from corn. But those numbers

are based on 2007 fuel consumption forecasts, and in the eight

years since, gasoline demand has grown more slowly than

anticipated.

Surging Demand

It has surged this year, however, creating the potential

for more biofuels to be added. Drivers burned 9.47 million

barrels a day in August, up 3.8 percent from two years ago.

The EPA’s initial proposal outlined on May 29, as directed

by a court settlement with the oil industry, would have required

refiners to use some 17.4 billion gallons of renewable fuels

next year, with about 14 billion of those coming from

traditional corn ethanol. For 2015, EPA proposed a requirement

for 16.3 billion gallons of total renewable fuels, including

13.4 billion in traditional ethanol derived from corn.

The higher final targets could provide inflationary

pressure on the price of renewable identification numbers, the

credits refiners use for compliance, said Timothy Cheung, vice

president of the energy research firm ClearView Energy.

Those RINs can be bought and sold by refiners and banked

for as long as two years.

Renewable Identification Numbers for ethanol rose to 60

cents after EPA’s announcement from 44 cents, earlier Monday,

data from StarFuels Inc., show.

(Updates with comment from American Fuel and Petrochemical

Manufacturers in 18th paragraph. An earlier version of this

story misstated the name of Green Plains Inc.)

To contact the reporters on this story:

Jennifer A. Dlouhy in Washington at jdlouhy1@bloomberg.net;

Mario Parker in Chicago at mparker22@bloomberg.net;

Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editors responsible for this story:

Lynn Doan at ldoan6@bloomberg.net;

Jon Morgan at jmorgan97@bloomberg.net

Justin Blum

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