Ethanol blending shrinking margins for refiners

Federally mandated ethanol blending is adding extra pressure to the faltering profits of U.S. refiners.

The worst crude oil downturn in a generation, which at first helped refiners’ profits, has now passed through to the fuel prices. Now, gasoline is cheaper than the ethanol that refiners have no choice but to use.

Ethanol averaged 30 cents above gasoline in Chicago during the first quarter, costing HollyFrontier Corp. $36 million. Chicago ethanol now runs at about a 2-cent premium to gasoline, while Los Angeles prices are 24 cents higher, David Hackett, president of energy consultancy Stillwater Associates said. Ethanol futures on the Chicago Board of Trade averaged 21.5 cents above gasoline contracts on the New York Mercantile Exchange in the quarter, compared with an average 48-cent discount in the same period during the previous five years.

The Renewable Fuel Standard program, introduced in 2005 under the Energy Policy Act by the Bush administration, mandates the use of about 18.11 billion gallons of renewable fuels this year, 80 percent of which is ethanol. For the first time, EPA this year mandated consumption targets that would exceed 10 percent of projected gasoline demand. EPA’s proposed biofuel targets for 2017 are currently under review at the White House’s Office of Management and Budget, according to a government filing.

The mandates have boosted ethanol prices, according to Ed Hirs, an energy economics lecturer at the University of Houston. “The mandated increased volumes provide a way to drive up demand for ethanol which is otherwise non-economic to produce.”

The Renewable Fuels Association, a U.S. ethanol industry trade group, declined to comment.

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