Republicans warn ethanol mandate could drive surge in gasoline

A motorist pumps fuel into his vehicle at JJ's Express Gas Plus station in Phoenix gas station in Phoenix, Arizona August 10, 2011.

WASHINGTON (Reuters) - Two senior Republican senators on Wednesday joined the oil industry in warning the ethanol mandate could push up gasoline prices for consumers ahead of the summer driving season.

The ethanol mandate requires increasing volumes of biofuels to be blended into the fuel supply each year through 2022. Refiners buy credits, or RINs, from producers of renewable fuels to comply with the federal targets.

Senators David Vitter of Louisiana and Lisa Murkowski of Alaska, urged the Environmental Protection Agency in a letter to take decisive action to protect consumers from the rising costs of the credits, known as RINs, required by the mandate for all producers of gasoline.

Slumping gasoline demand and other factors have pushed refiners closer to a so-called blend wall, a point when the law will require the use of more ethanol than can be physically blended into the fuel supply at the 10 percent per gallon level refiners prefer.

Attention on the once obscure RINs market has heightened as prices have spiked from a penny a gallon in December to over a dollar this month. That translates into a roughly a 10 cent rise at the pumps if 10 percent of the gallon was made from ethanol.

"We ask that you utilize any and all existing regulatory authority and flexibility to address the issue of rising RIN costs and alleviate the threat of increased consumer fuel costs," Vitter and Murkowski said in a letter to Gina McCarthy, President Barack Obama's choice to head the EPA.

The senators' letter was the first official response to the soaring costs of RINs by lawmakers. Murkowski is the top Republican on the Senate energy committee and Vitter the top Republican on the environmental committee.

So far, the arguments over RINs have played out relatively quietly in Washington, but a spike in retail fuel prices could add a new urgency to the public debate over renewable fuels.

RIN stands for Renewable Identification Number, a numeric code that producers or importers of renewable fuels are required to generate for each gallon.

FIGHT OVER HIGHER ETHANOL BLEND

Traders say the rising cost of RINs is tied into expectations that there may not be enough of the ethanol credits to meet demand next year, when the ethanol requirement threatens to exceed the blend wall.

Oil and gas companies now say that the mandate is unworkable, and the American Petroleum Institute is pushing to have the mandate repealed.

Still, ethanol producers argue that biofuels are helping to lower gasoline prices, and they blame the current credit cost woes on refiners' opposition to higher ethanol blends at the pump.

The EPA, which administers the ethanol mandate, has proposed that refiners and blenders use 16.6 billion gallons of biofuels in motor fuels this year. The EPA is accepting comments on the proposal through April 7 before it finalizes the rule.

While the EPA has authorized the use of up to 15 percent ethanol in each gallon of gasoline for cars built since model year 2001, refiners have argued the higher blend could damage older vehicles. Gas station operators and oil refiners have raised concerns they would be liable if engines are damaged.

Vitter and Republican Senator Roger Wicker, of Mississippi introduced legislation last month that would block the EPA from allowing higher levels of ethanol to be blended into gasoline.

API on Wednesday continued its fight for the repeal of the biofuel mandate, releasing the results of a study it commissioned on the impact of the "blend wall."

The study by NERA Economic Consulting predicted dire results if the mandate is upheld, including the loss of almost $800 billion in U.S. gross domestic product by 2015 and possible fuel shortages.

(Reporting by Ayesha Rascoe; Editing by Ros Krasny, Gerald E. McCormick, Jim Marshall and Kenneth Barry)