It was a remarkable week for anyone following the policy battle in Washington over what goes into your car’s gas tank. Word got out about an important policy change by the U.S. Environmental Protection Agency, which proposed significantly scaling back the amount of ethanol – a type of fuel made from corn – required to be blended with gasoline.
On Thursday, I reported on a draft proposal I obtained, which showed the EPA would for the first time use an escape hatch, known as a general waiver, to scale-back refiners’ blending obligations. Use of the waiver would allow the agency to significantly reduce ethanol blending obligations for 2014, from about 14.4 billion gallons required by law to 13 billion.
Here is the initial news story, followed by an analysis I wrote later in the day:
Other media outlets had reported on the figures citing anonymous sources. But the mystery remained of how the figures could be that low, or whether they were believable. The details of the waiver, sourced to the draft proposal, shed light on the puzzle, and the market really took notice after my story hit the wire.
Shares of a dozen U.S. refiners gained nearly $9 billion from Wednesday through Friday – a remarkable change which really highlights how closely investors were watching this whole issue. Corn futures fell to a three-year low, and ethanol credits which are used to enforce the EPA’s blending rules fell by nearly half to trade at their lowest levels since January.
Here’s a quick look at the refiners’ gains this week:
The reason for the sharp market reaction was that the EPA’s reversal marked historic retreat from a landmark 2007 law which mandated steadily increasing volumes of ethanol to be mixed into U.S. gasoline. With gasoline demand sagging, those volumes have had to be crammed into a shrinking gasoline pool, rapidly expanding ethanol’s share of the gas tank to near a 10 percent mark that most refiners refer to as a “blend wall” – the maximum ethanol content they say they can sell.
That’s led to a surge of some 2,800 percent in the cost of those EPA ethanol credits, saddling oil refiners with some $2 billion in additional costs this year to comply with the law, based on their public disclosures. News of the EPA’s proposed waiver was an indication that refiners – which have been the prime beneficiaries of the nascent U.S. energy boom – may end up paying a smaller tab for the credits in the future.
It is important to note that this is not a done deal. The EPA said on Friday it has not finalized its draft proposal – which has yet to get a nod from the White House and receive feedback from ethanol groups and other important stakeholders.
But one thing is for certain: the sharp market reaction shows how important and closely watched the battle over the gas tank has become. It will be interesting to see how it all plays out at gas stations, on the airwaves and in courtrooms over the coming months.