Rising U.S. gasoline demand offers EPA room to revise ethanol mandate

by Reuters
Wednesday, 8 January 2014 12:00 GMT

(Repeats item issued late Tuesday with no change to text)

NEW YORK, Jan 7 (Reuters) - The U.S. Energy Information Administration (EIA) revised up its 2014 gasoline demand forecast for a fourth straight month on Tuesday, opening the possibility that a controversial cut in ethanol blending mandates could be eased.

In its latest monthly report, the EIA again boosted its forecast, saying it now expects gasoline demand to hold about steady next year at 8.78 million barrels per day (bpd) or about 134.6 billion gallons.

In August, when the U.S. Environmental Protection Agency (EPA) was drafting a controversial proposal to cut 2014 blending mandates, the EIA was projecting that consumption would fall to 8.67 million bpd, or about 132.9 billion gallons.

The higher forecasts are important because they mean there could be more petroleum-based gasoline available than expected to blend with ethanol, leaving the agency room to lessen the proposed cuts in this year's biofuel blending quotas.

"It would give them adequate room, I think, to raise the renewable mandate by 200 to 300 million gallons," said Scott Irwin, an agricultural economist at the University of Illinois Urbana-Champaign.

"Not only could they, they should, because the methodology is based on these estimates and if the estimates go up, they should allow their number for the renewable mandate to float with the estimate for the blend wall," Irwin added.

In November, the EPA proposed scaling ethanol blending requirements to fit a 10 percent ethanol "blend wall" - the maximum amount of the fuel that refiners, car and engine manufacturers say can be used in the U.S. gasoline pool without risking engine damage.

Using this framework, the EPA arrived at about a 13 billion ethanol blending requirement for 2014 - down from 14.4 billion required by law and 13.8 billion mandated in 2013.

It was the first cut in renewable fuel targetts written into a 2007 law, and was seen as a clear win for oil refiners and a loss for biofuel producers.

But just as the agency adjusted its policy to account for the unexpected post-crisis decline in gasoline demand, consumption began to pick up again - albeit marginally.

The increased demand gave firepower to ethanol proponents, who said it was a sign the EPA should rethink its proposal to cut the mandate.

"Facts are tricky things and right now the facts are running contrary to the narrative the oil companies would like the EPA to act upon. There's no question that (gasoline) demand is stronger," said Bob Dinneen, head of the Renewable Fuels Association, which represents ethanol producers.

Dinneen said his group will raise the point in comments on the proposed mandates that it plans to file with the EPA.

The EPA said in its proposed rules that it would look at the latest EIA gasoline consumption estimates in setting the blending quotas.

Those estimates are subject to uncertainty and could still reverse course in coming months - an argument oil industry groups have used to urge the EPA to give itself headroom in case the forecasts turn out to be wrong.

"The proposed standards represent a significant challenge if finalized and would leave no tolerance to account for the difficulty of blending ethanol into each and every gallon," Bob Greco, downstream group director for the American Petroleum Institute, said at a December hearing on the proposed rules.

In August, the API petitioned the EPA to cap ethanol consumption at 9.7 percent of gasoline demand, or 12.88 billion gallons, to reflect the variability of gasoline consumption forecast by the EIA. The figure was based on a July estimate by the EIA of about 132.8 billion gasoline demand for 2014.

Interested parties have until Jan. 28 to file comments to the EPA. A final rule on blending mandates is expected mid-year. (Reporting By Cezary Podkul; Editing by Richard Pullin)

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