U.S. Biofuels Policy: Oil & Corn Industries Fight It Out

The Trump administration is desperately looking to broker a compromise between the warring corn producers and the oil lobby. As part of efforts to press on and work out the challenges in implementing a biofuel policy, the White House has had meetings with CEOs of some of the largest refining companies while at the same time hearing out lawmakers from the farm states.

The Fight Between Oil Refiners & Ethanol Producers

Farm groups and ethanol organizations are angered by the sharp increase in exemptions provided by the Andrew Wheeler-led Environmental Protection Agency (EPA) to the oil refiners. The concession allows refiners to obtain certain relaxations associated with requirements to purchase and mix ethanol into their gasoline blends or buy credits from others that do.

In August, the regulator granted what is known as the ‘RIN obligation waiver’ for 2018 to 31 refineries. Though lower than the 2017 count of 35, the number of ‘hardship exemptions’ have gone up significantly from the 12-15 handed out till few years back.

In addition to the larger-than-usual number of hardship exemptions, the U.S. corn lobby have been furious with reports that the EPA granted RIN obligation waiver – typically reserved for smaller refineries – to units of large operators like ExxonMobil XOM and Chevron CVX.

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Agriculture Industry Up in Arms

Agriculture industry bodies believe these waivers significantly lower the quantity of fuel to be mixed with ethanol, thereby effectively reducing the demand for biofuels (like ethanol) in U.S. and adversely affecting domestic corn producers. Moreover, these ‘secret handouts’ basically lets the refiners get out of their obligations to blend ethanol fuels and also undermines the market for renewable identification numbers (RINs) -- the tradable biofuel blending credits that refiners otherwise use to meet their obligation.

Finally, the alleged exemption (intended for small, financially weak refiners) granted to profitable energy giants has been condemned as being an unfair and illegal practice, apart from undermining the federal mandate. Under the provisions, smaller refineries producing less than 75,000 barrels per day) may apply for waivers with the agency on grounds of ‘disproportionate economic hardship.’ However, ExxonMobil and Chevron – generating billions of dollars in profits – hardly fits the bill to receive an exemption from the country's biofuel regulations, feels industry observers.

The agricultural groups further believe that the indiscriminate issuance of waivers will negate any gains from the recent changes to EPA’s biofuels policy that included modifications to the RIN market and the year-round availability of E15 ethanol. As it is, corn-based ethanol producers like Green Plains GPRE and Pacific Ethanol PEIX have been on the receiving end of the trade war, losing out on the export sales. In fact, the generous use of waivers for refiners hit the industry so hard that Green Plains, one of the nation’s largest domestic ethanol companies, had to permanently close a production plant.

Refiners Seek Concessions

Most of the above arguments have been dismissed by the refiners who insist that ethanol demand remains unaffected and they are, in fact, the ones who need support in dealing with the rising cost of biofuel blending mandates. Per reports, executives from Valero Energy VLO and Marathon Petroleum MPC – two of the largest U.S. refiners – in their meeting with President Trump, discussed the potential price caps on blending credits that the downstream companies must acquire to comply with the nation’s biofuel law. It is part of the Renewable Fuel Standard (RFS), which requires the mixing of renewable fuels (like corn ethanol or other biofuels) into gasoline and diesel.

Will Trump Bail Out Farmers?

President Trump is finding it tough to strike a balance between the biofuel companies and the oil refiners. The White House officials have proposed a 5% increase in biofuel blending quotas (or by 1 billion gallons over and above the current proposed levels) next year to ramp up ethanol purchases and compensate for the bulk refinery waivers. The expected increase in corn demand for American farmers should benefit the likes of Archer Daniels Midland Company ADM and Bunge Limited BG, who are active in the ethanol business.

However, the powerful agriculture industry has made it clear that they would prefer a structural revision to the policy guaranteeing future protection from refinery exemptions rather than a one-off boost in nationwide blending quotas.   

The situation is particularly tricky considering the importance of the oil and corn lobbies to the 2020 presidential election. These two constituencies propelled Trump to office in 2016 and he hopes to retain their backing in the next edition too.

As it emerges, we have surely not seen the last of the battle over renewable fuel standards. However, government representatives are hoping for a quick solution as any delay will make it difficult for them to follow regulatory protocols required to enact a change to blending mandates in time for implementation next year.

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Bunge Limited (BG): Free Stock Analysis Report

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