Ethanol Mandate Proving Costlier for Oil Refiners

Since January 14, the price of an ethanol credit has increased tenfold.

March 12, 2013

NEW YORK - A sharp increase in ethanol-credit prices in the past few months has made the cost of complying with a federal mandate to use corn ethanol much more expensive, the Wall Street Journal reports. The price of each mandated credit passed $1.00 last week, up from just a few cents last year.

"Eventually that cost is going to get passed along," said Bill Day, a spokesman for Valero Energy.

The new expenses "will have an impact on refinery margins," said Tom Kloza, chief oil analyst with the Oil Price Information Service, adding that refiners haven??t yet tried to pass along the higher costs to consumers.

The ethanol mandate requires the oil industry to blend more corn-derived fuel with petroleum-based gasoline each year. Last year, the mandate required the use of roughly 13.2 billion gallons of ethanol. When an ethanol maker produces a gallon, the company receives a credit representing roughly that amount of ethanol. Refiners then purchase those credits to establish how much ethanol they have blended into fuel. The government can fine a refiner if it lacks the requisite number of credits.

With about 10% of the U.S. gasoline market comprised of ethanol, refiners have been able to reach their quotas. Last year, the U.S. consumed about 133 billion gallons of gasoline, with roughly 13.3 billion gallons of ethanol blended into gasoline, just above the 13.2 billion gallon requirement.

However, the EPA??s proposal for this year, which may come as early as next month, could require refiners and fuel importers to use more than 14 billion gallons of ethanol.

Refiners are reluctant to blend gasoline with more than 10% ethanol because of compatibility concerns among automakers. Therefore, if Americans don??t purchase more gasoline than last year, the government mandate could conflict with the "blend wall." For that reason, the oil industry is urging the EPA to lowers it 2013 ethanol requirement.

With refiners and fuel importers concerned that the blend wall could be reached, they are purchasing additional credits on the open market, which has forced credit prices higher. Indeed, since January 14, credit prices have increased tenfold, from nine cents.

"I'm reluctant to say that we've hit the blend wall, but there certainly is the perception we have or that we are about to," Kloza said.

Citing the escalating prices for ethanol credits, Marathon spokesperson Angelia Graves said the government's mandate is "unworkable."

The EPA said it would determine this year??s ethanol mandate after the public comment period closes next month.

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