The Trump administration has proposed to allow the sale of higher concentration ethanol blends throughout the year. The sale of 15 percent ethanol, or E15, is currently not allowed during summer months because of its contribution to smog on hot days.
The proposal is an effort by President Trump to win back the corn and ethanol industries after angering them early on in his administration with policy and regulatory tweaks that favored oil refiners. While the initiative is intended to lower gasoline prices, the increased use of E15 will do very little to achieve that objective. At the same time, the proposal will do very little to resolve the heated battle between Big Corn and Big Oil.
Battle between corn and oil
The corn and ethanol industries have been at odds with oil refiners for years, with both sides fighting over how much ethanol should be blending in to the U.S. fuel supply. The Renewable Fuel Standard, passed in 2005, requires refined fuels to contain a portion of renewable fuels, which in practice, largely comes down to corn ethanol. Refiners can purchase credits, known as Renewable Identification Numbers (RINs), in lieu of buying and blending ethanol directly. The EPA presides over the program, and sets volume requirements that typically rise each year.
The EPA under the Trump administration made multiple regulatory decisions that seemed to mark a shift in policy compared to previous administrations, favoring the oil industry at the expense of ethanol. Across the Bush and Obama administrations, the increases in ethanol requirements were relatively predictable, even if they were the subject of intense lobbying from both the ethanol and the oil refining industries.
Across the Bush and Obama administrations, the increases in ethanol requirements were relatively predictable, even if they were the subject of intense lobbying from both the ethanol and the oil refining industries.
The Trump administration’s EPA over the first year and a half did not necessarily put forth an official policy change, but it nevertheless upended longstanding practice by dramatically increasing the rate at which it granted waivers to oil refiners to rid them of their blending requirements. The oil industry has long argued that purchasing ethanol or RINs was costly, but the EPA was sparing in its use of waivers in years past. In January 2018, the bankruptcy of Philadelphia Energy Solutions, the largest refiner on the East Coast, lent weight to the arguments from the oil industry. Philadelphia Energy Solutions blamed the cost of compliance with the Renewable Fuels Standard as part of the reason for its demise. The refiner spent more than $800 million on RINs since 2012, the largest expense for the company after the purchase of crude oil.
In 2017, the EPA granted 29 waivers for small refineries, an increase from 19 in 2016 and just 7 in 2015. That translated into an exemption of around 13.62 billion gallons of ethanol for 2017, almost twice the 7.8 billion gallons that the agency exempted in 2016.
The jump in waivers led to severe disruption for the price of RINs. Not only did waivers lead to a physical impact – less demand for ethanol from refiners – but the uncertainty surrounding the higher frequency of waivers led to a loss of confidence in the market. The price of RINs crashed. The credits traded close to $1 per credit last year, a five-year high. By late September, they fell to as low as 11 cents each.
E15 only a marginal impact on fuel prices
The year-round sale of E15 would provide a lift to the ethanol industry. Currently, the EPA prohibits its sale between June 1 and September 15 in areas where smog is a problem. From the ethanol industry’s perspective, that period of time is enough to deter owners of fuel stations from investing in the necessary infrastructure to sell E15 to begin with. E15 is only sold at a small fraction of fuel stations across the country, and installing the equipment capable of handling E15 is expensive.
The Trump administration argues that the year-round sale of E15 will lower fuel prices. “My administration is protecting ethanol…Today we are unleashing the power of E15 to fuel our country all year long,” Trump told a crowd in Iowa in early October. “I want more [use] because I don’t like $74,” Trump said at a White House meeting, referring to the price of the WTI oil benchmark. “That’s what I want. I want low prices.” The logic seems clear. Ethanol is cheaper than gasoline, so the increased use of ethanol could lower gasoline prices.
However, there are several factors that could blunt the impact of the policy change. First, the proposal has to go through the regulatory process; the White House cannot instantly change such a rule. The announcement from the White House was merely an order to the EPA to begin this process. It is unclear if the order will be finalized by next summer when the usual seasonal prohibition goes into effect.
Second, and more importantly, the rule change will face legal challenges. Oil refiners argue that the administration cannot permit the year-round sale of E15 without Congressional action to change the law. As the New York Times pointed out, new Supreme Court Justice Brett Kavanaugh even wrote an opinion on a 2012 case, stating that EPA does not have the authority to make such a move. “The waiver might be good policy; if so, Congress has the power to enact a new law permitting E15. But under the statute as currently written, EPA lacks authority for the waiver,” Kavanaugh concluded. The oil industry has vowed to aggressively litigate the rule change. The White House clearly felt the pressure to press forward anyway, hoping to amend a rift with farmers and the ethanol industry. The U.S.-China trade war has hit the corn industry hard, with Chinese tariffs sapping demand and lowering corn prices.
Third, the impact on fuel prices is questionable. The National Corn Growers Association estimates that the year-round sale of E15 could save motorists 3 to 10 cents per gallon. While that isn’t trivial, retail gasoline prices fluctuate by as much on a weekly and monthly basis depending on movements in global crude oil prices. Even if E15 use rises, the impact would be marginal at best.
Zero sum game
There is almost no middle ground in the battle between ethanol producers and the oil industry. Any movement to address the concerns of one side almost necessarily comes at the expense of the other.
The reactions from the industries reflected this split. Most corn and ethanol producers welcomed the news, even if they were not fully placated. “Allowing use of E15 gasoline year-round is an important step toward realizing a renewable energy future for transportation fuel sector, and we’re appreciative of the administration’s support for higher level blends of ethanol,” National Farmers Union President Roger Johnson said in a statement. “At the same time, this ‘compromise’ does nothing to address the billions of gallons of ethanol demand that were lost as a result of the EPA’s RFS waiver handouts to oil refiners. Family farmers are in significant financial distress right now, and the administration’s surreptitious biofuel demand destruction has made matters worse.”
For their part, oil refiners had little patience for the proposal. “EPA has previously stated that it does not have the legal authority to grant the E15 waiver, and we agree with that assessment,” said API President and CEO Mike Sommers. “The industry plans to aggressively pursue all available legal remedies against this waiver.”