The Fuse

Battle Between Ethanol and Refiners Reaches Stalemate

by Nick Cunningham | July 12, 2018

The current zero-sum battle between corn states and the biofuels industry on the one hand, and oil refiners on the other, is not new, but it exploded into a fierce fight over the past year as the Environmental Protection Agency (EPA) cracked open the door to a weakening of the Renewable Fuels Standard (RFS). The RFS dictates how much ethanol refiners need to procure. The exit of Scott Pruitt from the EPA could signal an end to open war between the ethanol and refining industries, returning it to a more familiar low-grade tug-of-war over annual blending requirements.

Simmering conflict erupts into crisis

The origins of the conflict date back to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007, two pieces of legislation that helped lead to a major expansion of ethanol production and its consumption. The legislation included and subsequently expanded the mandate for refiners to either buy and blend in ethanol into their fuel mixes, or purchase credits if they are unable to directly obtain ethanol. The requirements escalated over time and also required a small but steady increase in the use of advanced biofuels, a special carve out intended to promote next generation fuels.

Oil refiners have decried the requirements ever since, but across two administrations there was a degree of certainty about what to expect. To be sure, refiners and the ethanol industry would lobby and haggle over the specifics of the requirements each year through EPA rulemaking, but there was a general sense that the agency would adhere to predictable requirements.

The Trump administration has upended the battle, seeming to break with the past by repeatedly siding with oil refiners. In January 2018, the largest refiner on the east coast, Philadelphia Energy Solutions, declared bankruptcy, and the refiner put the blame on the credits, or Renewable Identification Numbers (RINs), that they were forced to buy to meet federal blending requirements. In the wake of that bankruptcy, the EPA chief called for reform of the RIN system, and increased the number and frequency of the waivers it granted to refiners—a practice that had already been underway since the beginning of Pruitt’s tenure—absolving them of their blending obligations. In the past, the waivers were typically reserved for extreme circumstances, when small refiners suffered “disproportionate economic hardship,” and the EPA only granted them sparingly. Under Scott Pruitt’s EPA, that changed. The number of waivers skyrocketed, even though there was no specific policy overhaul.

In May, a coalition of ethanol and farm groups sued the EPA over a series of waivers granted to oil refiners, alleging that the agency was not enforcing the law. The biofuels industry argues that not only are the waivers damaging by cutting into demand for their fuels, but they also wreak havoc on the market for RINs. The increasing number of waivers, many of which were not disclosed to the public, has sparked a steep decline in the value of these credits. The selloff is the result of expectations of looser requirements from the EPA, as well as the direct result of RINs that were once held for compliance being dumped back onto the market. In short, the proliferation of waivers for refineries dramatically reduced the value of RINs. Since September 2017, RIN prices have declined by 75 percent.

No middle ground

The Trump administration has spent months trying to hammer out a compromise between refiners and the biofuels industry, but it has struggled to find any common ground. Advancing a proposal to the benefit of one side almost necessarily undermines the other. Ethanol producers argue the waivers are destroying the RIN market. But refiners say the RIN system is fundamentally flawed. “We simply want to correct the flawed and indefensible RINs compliance mechanism that is destroying the independent merchant refining industry and the thousands of families sustained by it,” Philadelphia Energy Solutions said in a February statement.

This zero-sum dynamic has bedeviled the Trump administration, as it has prior administrations. But the support for refiners from Scott Pruitt’s EPA pushed the issue to the front burner, and the corn and ethanol industries, and their powerful allies in Congress, forced the issue.

At the end of May, the EPA was expected to unveil a formal policy change that was billed as compromise but ultimately favored refiners. The proposal would have counted ethanol exports toward the required annual quotas for refiners, which amounted to a lightening of the burden for refiners because they would not have to blend in as much ethanol into their fuel mixes. In return, the proposal would have allowed the year-round sale of E15, a higher concentration of ethanol that is currently subjected to restrictions during the summer. While that could expand the market for ethanol sales, corn states were not pleased with the package. The sale of E15 “isn’t anywhere near enough to offset the impact” of the ethanol export credits, Senator Charles Grassley (R-IA) said in a statement in late May. “I’m not convinced this is a win-win.”

The political pressure from corn and ethanol allies, in particular Iowa’s two senators, Charles Grassley and Joni Ernst, ultimately forced the Trump administration to shelve the proposal before it was released. But in late June, the EPA published the proposed blending requirements for 2019, and while the specific requirements—15 billion gallons—were in line with statute, the ethanol industry panned the proposal because it did not remedy the fallout from the long line of waivers previously granted to refiners. “This is a status quo proposal for ethanol and the status quo is bad,” Iowa Renewable Fuels Association (IRFA) Executive Director Monte Shaw said in a statement. “The ethanol number isn’t worth the paper it’s written on so long as Scott Pruitt is granting small refinery exemptions left and right—even beyond what the Department of Energy recommends.”

Scott Pruitt’s resignation could turn the page on this chapter, easing tensions between the ethanol and refining industries. With Pruitt gone, the EPA may “potentially make more sparing use of the” waivers, according to ClearView Energy Partners. There is still very little middle ground, if any, between ethanol producers and oil refiners. But the fight over ethanol could revert back to a more familiar low-grade lobbying battle over the specifics of the annual blending requirements, rather than the open warfare that played out during Pruitt’s tenure at EPA.