By Beth Hilbourn and John Auers
Although a little late for this summer season, the question of whether or not to extend the 1 psi waiver to E-15 (gasoline containing 15% ethanol) in the summer time has again become a hot topic in Washington. It has been debated since the E-10 (gasoline containing 10% ethanol) blend wall first became a limitation on the amount of renewable fuel that can be absorbed in the transportation pool, with proponents and opponents squaring off on a regular basis. Earlier this year, it was thought that the Trump Administration was preparing to grant the E-15 waiver, but for one reason or another, the announcement never came and E-15 continued to be relegated to RFG areas or conventional gasoline areas with low blendstock for oxygenate blending vapor pressures this summer. Recently, rumors of a waiver have been revived and it is certainly difficult to predict if an agreement on a waiver will actually be reached this time. Rather than speculate on this, we are instead devoting today’s blog to a discussion of what it would mean for refiners if it does come to fruition. Will they one day wax nostalgic about how E-15 has led to lower RIN costs in the same way Kid Rock sings about his summer of love in “All Summer Long” or will they curse the lost market share that a waiver might result in?
“And we were trying different things” – E-15 Politics
The timing of the latest consideration is suspiciously convenient for the upcoming elections. E-15 and the entire renewable fuel program are fraught with politics with a dollop of environmentalism added. What could be better for the country than replacing foreign crude oil with domestic ethanol? We become more energy independent, and it doesn’t hurt that domestic producers of ethanol are also voters, especially in key Midwestern swing states. The program can also be argued to be environmentally sound because we are not consuming limited resources. The arguments for and against these issues are well beyond any short article, but they help to frame the discussion. The bottom line is that the issues are more political than scientific. By raising the issue after the summer season and before elections, it is possible to straddle the issue for a time before it actually impacts next summer’s RVP control period. The parties that are likely to be involved in the posturing include the Executive Branch, Senators, Congressmen (and women), Governors, state legislators, renewable fuel producers both domestic and foreign, petroleum industry participants, farmers, cattlemen (and women) and just about anyone with an opinion on ethanol or gasoline production or consumption. The list is almost too large to compile. Since we can’t exhaust all of the arguments for these interests, this article focuses on refiners and how they might look at approval of the E-15 waiver.
“We’d blister in the sun” – Lost Market Share and Lower Refinery Throughput
An argument against the waiver by refiners is that the higher the ethanol content, the less fuel the refiners will produce through their refinery. This is a real argument and volumes might seem small until you consider the amount of gasoline consumed in the United States (U.S.). Gasoline consumption in the U.S. is on the order of 9-9.5 million barrels per day. Five percent of that is over 450,000 B/D. Assuming refinery charges are near 18 million B/D, in the simplest terms, utilization at refineries could decrease by 2.5% simply by allowing E-15. It is unlikely that runs would decrease by that amount because gasoline would likely be exported from the U.S. rather than reduce utilization. However, not many industries need to contemplate a reduction in demand of 2.5% based on a recurring rumor of imminent change.
“Not thinking ‘bout tomorrow” – Lower RIN Prices?
If E-15 is granted the 1 psi waiver, there will be up to 50% more ethanol blended into gasoline and won’t the price of RINs decrease? Possibly, but not necessarily. EPA’s current policy is to look at the ability to absorb ethanol into the fuel system, and it has unofficially recognized the blend wall at E10. If E-15 is granted the waiver, based on the past few years, EPA is likely to increase the RVO to force 15% ethanol into the transportation system. This could even have the opposite effect of raising RIN prices as the industry accommodates the higher ethanol percentage in gasoline. The current RFS mandate of 36 billion gallons of renewable fuel by 2022 has not been modified. EPA has limited the RVO based on a provision that if supply is limited, the RVO can be reduced. EPA has interpreted this provision to mean that if there is no demand, that is a limit on supply. If E-15 becomes a year-round option, EPA would be bound by the regulations and congressional mandate to increase the RVO to assume E-15 is the “de facto” limit. Refiners are not likely to enjoy much relief from RIN prices based on approval of the E-15. An exception might be if the approval of the E-15 waiver is after the RVO is set for a given year, RIN prices would be reduced. If that were to happen, the lower prices could cascade into future years, possibly until 2022 when the program must be reviewed.
“Turn it up” – E-15 and the Dilution Effect
A point not usually considered is the collision of the latest fuels regulations streamlining rules, the impact of granting the summertime E-15 waiver and the Tier III sulfur in gasoline regulations. Currently, very little conventional gasoline is allowed to capture the dilution impact of sulfur and benzene due to the addition of ethanol downstream of the refinery. This hasn’t been all that important until the sulfur content in gasoline was reduced from 30 ppm to 10 ppm for most refiners beginning in 2017. Sulfur credits became much more valuable under the new rule because it’s much harder to reduce gasoline sulfur below 10 ppm than 30 ppm. EPA’s proposed streamlining regulations will make it easier for a refiner to capture this diluent impact if they are finalized as proposed. In this scenario, refiners would benefit from the dilution effect of a higher ethanol content fuel.
Refiners are no different than any other manufacturers. They are used to competing in a free market and are leery of government mandates that cede their market share to other industries; however, they have been burdened in the past few years by very high costs due to RIN costs. If the E-15 waiver were to really reduce the price of RINs, most refiners and especially merchant refiners would be very happy. However, refiners are understandably wary that any approval of the E-15 waiver would just increase the RVO and RIN costs would not decline. Other issues which we haven’t discussed in this blog could also play important parts in how the waiver impacts refiners, including potential trade restriction on biofuels credits and the incompatibility issues E-15 has with many existing automobiles.
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (the 2018 Mid-Year Edition of which was issued in August) and our various other studies. In our Outlook, we have a Regulatory Initiatives section where we explore the impact of Regulations on petroleum product supply and demand. U.S. RFS policy also factors into our Alternative Fuels section of the Outlook. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting us at 214-754-0898 or visiting our website at turnermason.com.