By RYAN TRACY
The cost of complying with a federal mandate to use corn
ethanol in fuel has risen sharply in the past few months,
putting a squeeze on oil refiners.
The price of each credit that refiners need under the law
topped $1.00 last Friday, up from just a few cents last
"Eventually that cost is going to get passed along," said
Bill Day, a spokesman for Valero Energy, which sells
gasoline to about 5,000 filling stations in the US.
Valero and other big refiners, such as Marathon Petroleum
and Tesoro, haven't publicly estimated how the compliance costs
would affect earnings. The industry has been reporting steady
The new expenses "will have an impact on refinery margins," said Tom Kloza,
chief oil analyst with the Oil Price Information Service.
Refiners could attempt to pass the higher costs on to consumers
but so far that hasn't happened, he said.
The sharp rise in ethanol-credit prices reflects broader
problems with the 2007 law, which sought to drive increased use
of renewable fuels. Another piece of the mandate, requiring
industry to buy fuels made from nonedible plants, has run into
trouble because there isn't enough supply to meet federal
The ethanol provisions require that the oil industry blend
more of the corn-derived fuel with petroleum-based gasoline
each year. The government required the use of about 13.2
billion gallons of ethanol last year. When an ethanol maker
produces a gallon, the company receives a credit representing
roughly that much ethanol.
Such credits are subsequently bought by refineries to establish
how much ethanol they have blended into fuel. If a refinery doesn't have enough
credits, it can be fined.
Until now, refiners have been able to hit their quotas
because about 10% of US gasoline is ethanol. The US consumed
about 133 billion gallons of gasoline last year, according to
the Energy Information Administration. That meant that about
13.3 billion gallons of ethanol was blended into gasoline, just
above the requirement of roughly 13.2 billion gallons.
The Environmental Protection Agency's proposal for this
year, which could be made final as soon as next month, could
force refiners and fuel importers to use more than 14 billion
gallons of ethanol.
But refiners are reluctant to blend gasoline with more than
10% ethanol largely because auto makers say most vehicles can't
handle a higher rate. That 10% figure is known as a "blend
wall," keeping more ethanol from entering the market.
If Americans don't buy more gasoline this year than last,
the blend wall creates a conflict with the government's ethanol
requirement. The oil industry is pushing the EPA to lower the
2013 ethanol requirement.
Fears that they will hit the blend wall appear to have made
refiners and fuel importers eager to buy credits on the open
market, pushing credit prices higher. On Jan. 14, the price of
a credit rose above nine cents for the first time in more than
two years, according to the Oil Price Information Service. The
price has jumped more than tenfold since.
"I'm reluctant to say that we've hit the blend wall, but
there certainly is the perception we have or that we are about
to," said Mr. Kloza, the analyst.
The Renewable Fuels Association, an ethanol-industry trade
group, said refiners could market fuel blends with 15% ethanol.
That would allow more ethanol to be sold and make more ethanol
Lawmakers "knew that they were driving changes to the
marketplace as well, and it's those marketplace changes that
the oil companies are resisting," said Bob Dinneen, the
Refiners say consumers don't want 15% blends, largely
because auto makers generally advise against using blends that
high, except for models such as flex-fuel vehicles and some
Marathon spokeswoman Angelia Graves said the high prices for
ethanol credits showed that the government's mandate is
The EPA said it would determine this year's ethanol mandate
after a public comment period closes in April and declined to
address criticism of the rule until then.
Stephen Brown, Tesoro's vice president for
federal-government affairs, said the situation could give US
refiners an incentive to export gasoline because exports aren't
subject to the same ethanol requirements.
Dow Jones Newswires