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The Ethanol Sham

by | published October 11th, 2018

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E15 is the 15% mixture of ethanol and gasoline that currently is prohibited during the warmer months of the year.

On Monday, President Trump announced that he would end restrictions on the seasonal sale of E15.

The announcement brought a firestorm of activity in stock values for ethanol producers. But it also ushers in several problems…

First, it is obvious what this move really is – a not very well disguised attempt to buy corn producing votes in the approaching midterm election.

Corn is most often used in the production of anhydrous ethanol in the U.S. and the decision seems to mean an expanded domestic market for the raw material.

But the presidential action also has brought an immediate push back from the oil product refining sector.

Why?

Because any government move to increase the use of ethanol in the country’s retail gasoline mix increases the costs to refineries in the manufacture of high octane gasoline.

And the initiative, which still requires a detailed plan to administer it, would have some other adverse implications…

The Environmental Uproar of the Announcement

Critics were quick to pounce on the environmental impact.

“Reid vapor pressure” (RVP) is a term for gasoline volatility, and it is monitored when the weather is warmer to reduce evaporative emissions from gasoline that contribute to ozone problems at ground level.

The Environmental Protection Agency (EPA) regulates this RVP of gasoline during the summer from June 1 to September 15.

And now, the president’s announcement appears to be at loggerheads with existing legislation intended to restrict pollution.

Adding ethanol to gasoline increases particulates to smog. In my read, Congress would have to make revisions in statute to allow this E15 change. It cannot be done by a simple executive action.

As with attempts from the White House to march back coal standards in search of political support in places like West Virginia, southeastern Ohio, and eastern Kentucky, the ethanol change means another environmental slugfest is looming in advance of an election.

A Few People Get the Pro…

Additionally, there is a problem for both auto manufacturers and the driving public.

As the American Petroleum Institute noted shortly after the Trump press release, “E15 can damage vehicle engines and fuel systems – potentially leaving consumers on the hook for expensive repair bills. In fact, three out of four vehicles on the road today were not designed for E15.”

Now, for most of the year I live in flat south Florida. But during the times when I am back in Western Pennsylvania, the hills have implications for the use of increased ethanol mixes. On average, ethanol contains barely 80% of the power contained from straight gasoline.

The difference in performance is not simply measurable. You can feel it while driving. One of the strongest arguments in favor of reducing the ethanol component sounds almost paradoxical:

To offset the power reduction from increasing ethanol content, one must add more gasoline.

The proposed change also has a more pervasive economic consequence for the broader gasoline production and distribution sector.

This involves the rather complicated world of renewable fuel credits…

…And the Rest Get the Con

Renewable identification numbers, or RINs, are used to track batches of biofuel, such as ethanol.

These numbers serve as credits and act basically like a currency in the government’s renewable fuel standard program. That program has as its objective the reduction of greenhouse gas emissions. Renewable fuel producers generate RINs, and other parties are required to obtain and ultimately retire RINs for compliance, according to a process overseen by the EPA.

But market participants are allowed to trade RINs, which has resulted in a distinct and separate exchange system.

One of my industry contacts explains it this way: “Retail gasoline stations have an interest to sell gasoline containing ethanol. The more they sell, the more RINs they collect. These, in turn, can then be sold to refiners that are not blending enough ethanol with the gasoline they produce.”

The concern now is that refiners may lose shares in the gasoline market because the Trump announcement will drive down RIN prices, pushing greater demand upstream to ethanol producers in 2019.

In contrast, refiners who have had the high RIN values bolster profit margins are likely to see that revenue flow.

Meanwhile, independent refiners would find their compliance costs decline in a rough proportion to the decline in “big boy” refining profits.

This could get very testy.

At the same time, Trump is looking to buy votes.

In return, corn growers get some money in their pockets. Oil refiners get another headache and a further assault on their revenues. And the average American motorist, apparently, just gets the shaft.

Sincerely,


Kent

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