Big news in the battle over what goes into your car’s gas tank

How much ethanol should go into your gas tank? The EPA decided to cut ethanol blending mandates in 2013: Photo: Wikimedia Commons.

On Oct. 10, 2013, I broke news that the Environmental Protection Agency would for the first time use an escape hatch known as a general waiver to scale-back oil refiners’ ethanol blending obligations. Use of the waiver would allow the agency to significantly reduce the amount of ethanol that oil refiners would have to blend into their gasoline output in 2014 – about 13 billion gallons, down from about 14.4 billion required by law.

Here is the initial news story, followed by an analysis I wrote the next day:

“EPA proposes big reduction in 2014 ethanol blend volume –document”

“Analysis: Lawsuits likely as EPA declares US ethanol blend wall a ‘reality’’

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:

MPC Market Cap Chart
MPC Market Cap data by YCharts.

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.