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Toyota Motor Corporation (ADR) (TM), Ford Motor Company (F), KiOR Inc (KIOR): Well, This is Awkward…

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Approximately 40% of all corn grown in the United States goes to ethanol production. Photo: Wikimedia Commons.

To blend or not to blend? That is the question refiners will need to answer in 2014 as they cope with falling gasoline demand and strict ethanol blending mandates set by the EPA. The Renewable Fuel Standard has been in place since mid-2005, although for the most part, consumers haven’t noticed one way or the other. That could change in a big way if refiners’ predictions prove correct.

I recently spoke with Charles Drevna, president of the American Fuel and Petrochemical Manufacturers, to discover how ethanol blending will affect refiners, consumers, and the economy in 2014 and beyond if ethanol mandates aren’t adjusted downward. Here’s what I learned.

Toyota Motor Corporation (ADR) (NYSE:TM)

Tug-of-war
Before speaking with Drevna, I figured that a lot of the arguments stemming from the refining industry were just attempts to protect its own agenda. That obviously plays a part for all sides involved in the issue, but it now appears to me that refiners are largely caught in the middle. Refiners serve a relatively simple purpose: They create finished petroleum products from crude oil and distribute it to the market, be it independent gas station owners or third-party distributors. That simplicity is getting much more complicated with soaring ethanol blend rates.

Source: Energy Information Administration.

The nation is precariously close to the Blend Wall, or the line the auto industry has drawn in the sand for ethanol blending ratios. It is currently defined as 90% gasoline and 10% ethanol, or E10. It is also at the heart of the battle between the EPA and the ethanol industry and the refining, automobile, and food industries. The EPA thinks E15 can solve the problem, and it could, but only if the nation’s auto industry and infrastructure agree.

Refiners are hit particularly hard because they’re required to purchase renewable identification numbers, or RINs. The University of Missouri succinctly summarized the issue in a December 2012 study titled “A Question Worth Billions: Why Isn’t the Conventional RIN Price Higher?” (Link opens a PDF.)

(RINs) are certificates fuel blenders use to prove mandate compliance. Fuel blenders can buy or sell RINs. The conventional RIN price indicates how difficult it is for fuel blenders to meet the overall mandate. … Pushing more ethanol through the system would be increasingly difficult for fuel blenders, meaning conventional RIN prices could rise.

In a case of academic foreshadowing, the report was published right before RIN prices jumped from a few pennies per gallon to nearly $1.50 per gallon this summer. Those costs are inevitably passed on to you, the consumer, but things could get much worse. The amount of ethanol required to be blended into gasoline is directly determined by how much fuel a refiner or blender sells to the market. If the supply of RINs continues to tighten up, top refiners such as Valero and Phillips 66 could simply produce less gasoline to reduce their obligations and costs — a realistic business decision. That, of course, would tighten the nation’s gasoline supply and send gasoline prices much higher.

How are refiners caught in the middle? They can’t sell ethanol blends to independent gas station owners if they (and their customers) don’t want the product, which limits hopes that E15 and E85 can solve the problem. Exporting isn’t always an option, either, as many nations refuse to purchase E10 gasoline outright or impose tariffs on imports to spur domestic biofuel programs. Furthermore, refiners would be in a tough spot for selling blends greater than E10 if it causes millions of Americans to void the warranties on their cars — the biggest question mark heading into 2014.

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