Tuesday, October 15, 2013

The Economy is About to Get a Huge Boost From Reversing the EPA's Ethanol Mandate

Centrally planned economies, what could possibly go wrong?
From Yahoo's BreakOut:

Gas Prices Could Dip Below $3 by Year-End: Lutz
According to David Lutz of Stifel, Nicolaus & Company, consumers are going to get a big boost to their wallets before the end of the year — and the source could surprise you. According to Lutz, the Environmental Protection Agency (EPA) is about to make some long-overdue adjustments to the federal ethanol mandate that's been acting as a stealth tax on American drivers for years. The result could push the national average price for a gallon of gas lower than anything we've seen since the depths of the Great Recession.

First, a word on how we got here. As Lutz explained last summer, the 2005 Clean Air Act mandated that refiners blend ever rising amounts of ethanol into gasoline. As long as U.S. gas consumption was rising, meeting the ethanol blend requirement was arguably misguided but no more so than other economic policies with unintended consequences.

What neither the EPA nor anyone else saw coming was the drop in demand for gas. Were the U.S. Energy Information Administration's website not down as part of the government shutdown, this link would show that gas demand hasn't been this low in over a decade.

The vast majority — around 90% — of American cars don't work with an ethanol blend over 10%. When the ethanol requirements continued to rise while demand for end product fell, the refiners were reduced to buying and selling RINs or Renewable Identification Numbers, which are, in effect, credits that allow refiners to meet the terms of the 2005 Clean Air Act without producing fuel that is unsuitable for most cars....MORE
One word of caution, Agrimoney said this morning that the EPA is making noises that it won't actually make the change:
Morning markets: corn revives as ethanol reform fears recede
...Ethanol considerations

Still, there is more to corn's revival than mere technicalities, with growing doubts that the limits on corn ethanol production proposed by the Environmental Protection Agency, according to a leak last week, will actually be enacted.

The EPA has "reiterated that the leak was only of a draft, not a proposal which has many in the market unsure of what to expect when they finally reopen for business" after the government shutdown ends, one US broker said.
Furthermore, even if the EPA proposal is enacted, apparently cutting 1.4bn gallons from the corn ethanol blending mandate, to 13.0bn gallons, would it actually be so serious for demand?..
On a related note the EPA also mandated the amount of ethanol from cellulosic sources.
From Platts:
API sues US EPA over 2013 Renewable Fuel Standard's cellulosic mandate
A major oil industry group on Tuesday sued the US Environmental Protection Agency over its 2013 Renewable Fuel Standard, saying that its blending mandate for cellulosic ethanol is unrealistic.

The 2013 RFS requires refiners to blend 4 million gallons of cellulosic ethanol, but the American Petroleum Institute noted that only 142,000 gallons are available for blending so far this year.

"EPA's unrealistic ethanol mandates for 2013 are simply bad public policy," said Harry Ng, API vice president and general counsel. "EPA issued this year's requirements nine months late and has once again mandated significantly more cellulosic ethanol than is available in the marketplace."...MORE