| LONDON, March 21
LONDON, March 21 U.S. data suggests the
percentage of ethanol in the gasoline supply is nearing the
"blend wall" - the 10 percent level beyond which refiners fear
to go - but perhaps not close enough to explain a sudden jump in
the price of compliance credits.
Other explanations for the price rise could include new
expectations that the blend wall will be reached next year; a
lack of available product after a fall in U.S. ethanol output
last year; speculative buying of compliance credits; or a
combination of these.
It is important to resolve the cause, given concerns among
lawmakers that rising ethanol compliance costs are adding to
gasoline prices ahead of the summer driving season.
Two senior Republican senators on Wednesday joined the oil
industry in warning that the U.S. ethanol mandate could push up
Both senators who sent a letter to the Environmental
Protection Agency (EPA) represented states with a large energy
industry presence. Some lawmakers who represent states where
grain is grown or ethanol is produced have blamed speculators
for pushing up the prices of compliance credits called RINs.
The blend wall refers to the problem of exceeding 10 percent
ethanol by volume in gasoline (called E10) because of the costly
infrastructure development required to roll out higher blends
such as E15 and E85.
Distribution of such higher blends is lagging because of
concerns about their impact on the performance of older cars.
The U.S. Renewable Fuel Standard (RFS), expanded under the
Energy Independence and Security Act of 2007, requires fuel
producers to blend a certain percentage of biofuel into gasoline
and diesel, or else buy compliance credits called Renewable
Identification Numbers (RINs) in a secondary market.
Each RIN is equivalent to a gallon of biofuel.
The RFS sets extremely ambitious targets for blending
bio-ethanol and biodiesel over the next decade. (See Chart 1)
Falling gasoline demand coupled with the rising renewable
fuel mandate means fuel producers will almost certainly have to
blend more than 10 percent ethanol in gasoline in the next two
years, or else buy RINs.
The blend wall is therefore one possible explanation for a
recent RIN price spike. Another is falling U.S. ethanol output
last year after drought drove up the price of corn feedstock.
RIN prices stabilised this week, trading at 70 cents for
2013 credits on Wednesday. Earlier this month the credits were
trading well above $1 a gallon, more than 1,000 percent above
levels seen at the end of last year.
That raises the interesting possibility that the EPA may in
future years either waive the ethanol target, or raise the
mandated contribution from alternatives such as biodiesel, which
faces no blend wall issues and currently has a manufacturing
Chart 1: link.reuters.com/fux76t
Chart 2: link.reuters.com/gux76t
Chart 3: link.reuters.com/hux76t
A U.S. Energy Information Administration paper in October
2011 published a straightforward methodology for estimating the
blend ratio of ethanol.
Applying that method to more recent survey data on supplied
motor gasoline product and ethanol consumption could help
confirm whether a nearing blend wall is indeed a contributing
factor to rising RIN prices.
The EIA authors presented three approaches for calculating
the blend ratio, in their paper, "Issues and Methods for
Estimating the Share of Ethanol in the Motor Gasoline Supply".
The first compared total net inputs of ethanol with net
production of gasoline blended with ethanol, and appeared to
over-state the ratio and so is discarded here.
The other two compared ethanol consumption with total
supplied gasoline product, with and without gasoline exports.
An approach which included gasoline exports would assume
that U.S. fuel producers were adding ethanol to these.
Applying the EIA methodology to data available until
December last year, it emerges that the blend percentage last
year was almost identical to 2011.
The ethanol blend percentage averaged for the four months of
March, June, September and December was 9.7 percent in both 2012
and 2011, excluding gasoline exports.
The corresponding figure when accounting for exports was 9.2
percent in both years. (See Chart 2)
That may suggest that the RIN price run-up had over-stated
the blend wall problem.
Applying the implied corn ethanol mandates for 2013-2015 to
a fixed 2012 gasoline supply, however, reveals that the blend
wall will be rapidly breached unless fuel producers comply by
buying RINs instead. (Chart 3)
The impending blend wall is indeed therefore one explanation
for the RIN price spike.
Another explanation could be falling U.S. ethanol production
last year after a major drought reduced the supply of corn.
The number of conventional ethanol RINs generated last year
fell to the equivalent of 12.97 billion gallons, according to
EPA data, updated as of Feb. 7.
That compares with an implied corn ethanol mandate in 2012
of 13.2 billion gallons.
And it is fewer than the number of such RINs generated in
the two previous years, at 13.59 billion and 13.57 billion
gallons in 2011 and 2010, according to the same EPA data.
Another possible explanation for higher RIN prices is
speculative buying, which is difficult to demonstrate besides
referring to spikes and troughs in prices over the past few
Resolving the cause will be a central task as lawmakers grow
more concerned about the impact on gasoline prices, and as the
farming and oil and gas lobbies square up, for and against the
renewable energy scheme.
(Reporting by Gerard Wynn; Editing by Anthony Barker)