Ethanol prices have skyrocketed to their highest level in a decade, contributing to surging US petrol prices as oil refiners pay more for the biofuel they are required to blend with their products.

The price spike is adding grist to a long political debate over the federal ethanol blending mandate, known as the Renewable Fuel Standard (RFS). Politicians from oil and gas states have sought to repeal the requirement, calling it ineffective and expensive, while corn state politicians have defended it, arguing it has added to US fuel supplies and decreased consumer costs.

Since the RFS became law in 2005, ethanol has traded at around the same price as unblended petrol, or at a discount to it. The two have diverged this year as ethanol has increased about 157 per cent to $US3.42 a gallon in 2021, while unblended petrol is up about 61 per cent to $US2.28 a gallon, according to FactSet data.

The price of the finished US petrol consumers buy, which includes ethanol and other additives, is up about 62 per cent this year, the highest levels since 2014. It was about $US3.40 a gallon on average this week.

Now, lobbyists for the refining industry are seizing on the recent ethanol price jumps and urging the Biden administration to lower the amount of the biofuel they are required to blend with their products, arguing it will tamp down petrol prices. Supporters of the biofuel industry argue the opposite is true, and are warning the administration against relaxing the requirements.

Most analysts agree that the primary causes of rising fuel prices are increased energy demand, spurred by an uptick in global economic activity, and oil production that hasn’t kept pace. But the cost of complying with the RFS and other regulations is adding nearly US20c to the price of a gallon of petrol in some parts of the country.

“There is a cost to environmental compliance,” said Andy Lipow, president of Lipow Oil Associates in Houston. “The cost of that compliance is being passed through to the consumer.”

Mr Lipow said the last time petrol was around its current price in 2014, the cost of complying with the RFS added less than US3c to the price of a gallon of petrol, but now adds around US15c. Compliance with state-level environmental regulations, particularly those in California, are adding an additional US4c to nationwide gas prices.

Fuel demand and traders piling into commodities as a hedge against inflation have pushed ethanol prices to record levels. Daily production of ethanol in the US hit a record level of 1.11 million barrels a day in October, according to the US Energy Information Administration, but has been unable to keep up with demand as many drivers return to the road. Agricultural prices more broadly have risen on the back of a snarled supply chain and higher input costs for crops.

The White House is under pressure to respond to public concerns about mounting fuel costs. The US and five other countries said on Tuesday they will tap their national strategic petroleum reserves in an attempt to bring down petrol prices, a move some analysts say will provide only short-term relief.

Last week, President Biden called on the Federal Trade Commission to investigate whether oil and gas companies are participating in illegal conduct aimed at keeping petrol prices high.

Chet Thompson, president of the American Fuel & Petrochemical Manufacturers, which represents refiners, said releasing reserves wouldn’t address factors increasing pain at the pump.

“A good place to start would be right-sizing RFS mandates, which have a substantial impact on fuel costs and have contributed to the shuttering of six refineries amid the pandemic,” Mr Thompson said.

Under the RFS, refiners must blend certain volumes of ethanol into petrol, set annually by the Environmental Protection Agency, or buy credits from refiners who have blended more than the required amount. Typically, petrol is required to be around 10 per cent ethanol, but the EPA has delayed decisions on annual volume requirements for 2021 and 2022.

Geoff Cooper, president of the Renewable Fuels Association, which represents ethanol producers, said it was absurd to argue ethanol is adding to higher fuel costs based on irregular market conditions. As recently as September, ethanol and unblended petrol were trading around the same prices. Research has shown that the biofuel generally did not increase petrol prices, he said.

“Refiners are always looking for an opportunity to scapegoat the program,” Mr Cooper said.

A group of small refiners has argued to the White House that they will go bankrupt if the Biden administration doesn’t roll back blending requirements, further exacerbating soaring petrol prices. Some of the companies have slowed their purchases of blending compliance credits, amassing billions of dollars in regulatory obligations that will come due in March when credits must be turned into the EPA for the previous year.

“They’re really rolling the dice by ignoring their compliance obligations under the RFS, thinking they will get bailed out by the administration,” said Mr Cooper.

The AFPM has argued there is a scarcity of credits and that the administration should grant petitions for relief from the RFS made by small refiners for 2019 and 2020. The Trump administration didn’t issue a decision on the relief petitions, and the Biden administration has delayed decisions on them.

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