Federal ethanol mandate could disrupt fuel supply, refineries warn

March 18, 2013

According to the American Petroleum Institute trade group, government requirements for refineries to use corn ethanol or other biofuels might cause a serious problem with fuel supply this year.

According to the American Petroleum Institute trade group, government requirements for refineries to use corn ethanol or other biofuels might cause a serious problem with fuel supply this year, as gasoline demand has been weaker than expected, Bloomberg reported.

In addition to sluggish demand, refineries have been facing rising costs of complying with the federal ethanol mandate. The Wall Street Journal has said that the price of each credit that refiners need under the law hit $1.00 last week and continued to rise, whereas in 2012 each credit cost just a couple of cents, thus making the targets very hard to meet.

Speaking at an Environmental Protection Agency (EPA) hearing in Michigan, Kyle Isakower, vice president of the American Petroleum Institute, said that ethanol was expected to exceed 10 percent in transportation fuels in 2013. He noted that many refiners were either reluctant or unable to sell blends richer in ethanol, as they can damage certain vehicles and consumers are unwilling to use them. Isakower warned that the problem might become worse and have negative consequences for the entire economy, unless the EPA takes urgent measures to deal with it.

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The American Petroleum Institute, which represents oil producers and refiners, stated that the biofuels mandate did not work well and called for a repeal of the 2007 Renewable Fuel Standard. Under current regulations, the oil industry is required to blend more of the corn-derived fuel with petroleum-based gasoline each year. Last year, the federal government required the use of 13.2 billion gallons of ethanol. For each gallon of ethanol produced, manufacturers receive a credit representing roughly the same quantity of ethanol. Those credits are then bought by refineries as evidence of how much ethanol they have blended into fuel. If a refinery fails to prove it has bought the required number of credits, it can be fined.

According to the EPA's annual minimum requirements for refiners, this year the use of ethanol, biodiesel, cellulosic biofuels and other renewable fuels has to increase to 16.55 billion gallons. The EPA claimed that the mandate boosts production of domestic fuels and reduces greenhouse-gas emissions by cutting the use of petroleum-based fuels like gasoline or diesel. Official figures from the U.S. Energy Information Administration reveal that total ethanol production in the United States fell by 16 percent to 805,000 barrels a day in the week ended March 1. The peak in production was recorded in December 2011, when a total of 963,000 barrels were produced. Current levels of production would come in at 12.3 billion gallons for the year, meaning that refineries will be short of their target of 13.8 billion gallons for this year.

Meanwhile, analysis of the overall gasoline and diesel demand shows that the demand has not grown as predicted in 2007 and is expected to fall over the next 12 years, suggesting that the ethanol mandate will take up a bigger share of fuels, Bloomberg reported.

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