Why Carl Icahn And Valero Are Pushing For Biofuel Changes In Washington

The 12-year old debate between oil and biofuels over the U.S.’s Renewable Fuel Standard appears to have recently shifted away from ethanol volume over to “obligated parties.”

Since first enacted in the Energy Policy Act of 2005, oil companies, refineries, and distributors have been through waves of political and legal battles with biofuel producers and fuel blenders over the law’s Renewable Fuel Standard. The U.S. Environmental Protection Agency has been enforcing the law, and has tended to side in favor of biofuels in support of the alternative fuel.

As part of the legislative framework, a compliance structure was included based on trading credits. Renewable identification numbers (“RINs”) are assigned to biofuels as they pass through the supply chain – allowing biofuel producers and distributors the ability to sell credits. “Obligated parties” are required to submit their quota of RINs to the EPA to demonstrate compliance with the federal law.

Who the obligated parties are going to be has been the hotspot for debate in Washington lately, with oil producers such as Carl Icahn, majority shareholder in oil refiner CVR Energy, looking to get this responsibility passed on to the biofuels industry.

Oil industry associations have been battling biofuel mandates and instability of trading RIN credits, pointing to the costs the industry assumes. Oil prices also play a role in setting trends in RIN credit trading and producing the biofuel blends.

Refinery company Valero says that complying with the federal standard costed the company $750 million in 2016. Valero does produce some of its own ethanol, but is also the largest refiner in the U.S.

Valero and other refiners want to redefine “obligated party” to mean the entity that holds title to the fuel immediately prior to sale, moving it upstream to biofuel producers, blenders, and distributors.

Parties on both sides of the biofuels policy debate are waiting impatiently to see how the Trump administration will go on the issues. President Donald Trump has been supportive of the Renewable Fuels Act, but the administration has been taking a neutral stance lately.

Trump did begin supporting the biofuel blend during campaign speeches for the early Iowa primary and in nearby states. The biofuel industry has been based in Midwest states heavy with corn fields, as corn ethanol has supplied about 10 percent of the blended fuel in U.S. gas stations for several years.

Icahn has been a vocal supporter of resolving the issues, and has been an unpaid advisor to the Trump administration. He’d like to see his suggested modifications made soon, describing it as "a matter of extreme urgency" that must be addressed "to avoid potential bankruptcies."

As you can see in this EPA chart below, biofuel blend volumes have been increasing in recent years and will continue to do so through at least this year.

The major point of conflict over the past dozen years between oil and biofuel entities has been the blending wall between gasoline and diesel and biofuels. Most of the mandatory fuel volumes under the federal act are filled by ethanol, but diesel blends from biofuels and renewable diesel have been increasing in recent years. On the chart above, ethanol falls under “Renewable fuel,” and biodiesel falls under “Advanced biofuel.”

The fight has been focused on bringing the gasoline blend from its current level at around 10 percent up to 15 percent -- and up to 85 percent ethanol in flex-fuel vehicle. Biofuel producers have been promoting the benefits of taking the blend up to 15 percent supporting emissions reductions and domestic job creation. Oil groups have been fighting that argument, often citing automotive engineers who warn about the corrosive and damaging effect that gasoline going higher than E10 can bring.

Some environmental groups have opposed raising the blend higher than 10 percent due to the whole environmental impact of growing and converting the corn to ethanol; and global regulators have been concerned over the “food versus fuel” issue when higher percentages of corn go into fuel rather than food, driving up prices.

The American Petroleum Institute (API) estimates that Environmental Protection Agency rules on 2017 biofuel volumes will put the ethanol-to-gasoline ratio at 10.4 percent, higher than the 9.7 percent ratio recommended by the oil industry association.

Whatever ruling the Trump administration makes through EPA policy, it’s bound to address both the issues of obligated parties and biofuel blend volumes.

By Jon LeSage for Oilprice.com