Ethanol Mandate Seen Causing Fuel Disruption

Government-mandated ethanol production could cause “significant fuel-supply disruption” this year as gasoline demand has lagged behind forecasts, according to the American Petroleum Institute.

Increasing requirements for refiners to use ethanol or other biofuels, paired with lower consumer demand, means that ethanol is on track to exceed 10 percent in transportation fuels this year, according to Kyle Isakower, the trade group’s vice president. Refiners are unwilling or unable to sell higher-volume ethanol blends because it can damage some vehicles and consumers reject it, he said.

“This is just the tip of the iceberg,” he said in testimony delivered today at an Environmental Protection Agency hearing in Ann Arbor, Michigan. “The negative economic consequences are bound to get worse unless EPA acts.”

The Washington-based institute, which represents oil producers and refiners, argues that the biofuels mandate is “unworkable,” and it’s pushing Congress to repeal the 2007 Renewable Fuel Standard.

Under 2007 legislation, refiners are required to use a certain amount of biofuels each year, or buy credits in the marketplace. The price of those ethanol credits jumped to 75 cents each from an average of about 2 cents or 3 cents in 2012, reflecting the fact that ethanol requirements are going to be harder to meet this year, Isakower said.

Annual Minimum

The use of renewable fuels including ethanol, biodiesel and cellulosic biofuels must rise to 16.55 billion gallons this year, the EPA said Jan. 31 in issuing its annual minimum requirement for refiners.

The EPA and renewable-fuel producers say the mandate spurs production of domestic fuels and cuts greenhouse-gas emissions by reducing use of gasoline or diesel.

Ethanol production dropped 16 percent to 805,000 barrels a day in the week ended March 1 from a record 963,000 barrels in December 2011, data from the U.S. Energy Information Administration show. That’s 12.3 billion gallons on an annualized basis and short of the 13.8 billion gallons refiners are required to use this year.

At the same time, overall demand for gasoline and diesel hasn’t grown as much as forecast in 2007, and is now expected to fall over the next 12 years, meaning that mandated ethanol is taking up a greater share of fuels. At the same time, government regulators haven’t cleared gasoline containing more than 10 percent ethanol for use in all automobiles. Refiners call that the “blendwall.”

“The increasing price of renewable fuel credits is a clear indication that refiners have breached the E10 blendwall this year,” Isakower said.

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