Agribusiness, Ethanol, & Refiners: ADM, AGCO, ANDE, AVRW, BG, BIOF, CF, CPOW, CNH, CALM, DE, HRL, GRH, KIOR, PEIX, MON, MOS, POT, REX, VRNM, VLO, SZYM, PPC, CZZ, DYAI, GPRE, MGPI, REGI, REX, STLK, MPC, TSO, CVX, XOM, HES, PBF, NTOIF, CASY
Iowa Senators Chuck Grassley and Joni Ernst met with EPA Administrator Scott Pruitt on Monday regarding recent moves by EPA to address high RINS prices by proposing a reduction in biofuel volumes and allowing ethanol exports to generate additional RINS.
But they didn’t come to play nice. They brought a hostage with them. It was the type of move that would make Carl Icahn blush.
If Pruitt didn’t provide a written assurance of reversing course on these matters, Ernst would block a vote on EPA’s nominee for Assistant Administrator for Clean Air policy which is responsible for about 80 percent of all EPA’s activities.
On Thursday night, Pruitt sent an extraordinary letter to Grassley, Ernst and other farm state Senators that not only reversed course on lower biofuel volumes and ethanol exports but also shut the door on changing the point of obligation. All of the measures were sought be refiners to lower compliance costs and RINS prices.
When we wrote about ethanol exports and the proposal to lower biodiesel volumes in late September and early October, we warned that “corn state politics is a risk to the policy change.”
By all accounts, the Administration supported the policy changes to the RFS to lower RINS prices but the politics were too much for them in the end. Indeed, the decision to cave to the ethanol industry seems to have been directed by the White House.
Washington was buzzing on Friday at the extraordinary written assurance that EPA provided to the Senators because it appears to be pre-judging the outcome of a regulatory proceeding. As a result, the letter itself –sought by the Iowa Senators-- could be used as a weapon to challenge the RFS in the courts when the final rule is issued in November. Most RFS rules are subject to litigation but the Pruitt letter is being viewed as a smoking gun that exponentially increased the likelihood of overturning the rule in a court challenge.
The key language of the letter is “preliminary analysis suggests that all of the final RVOs should be set at amounts that are equal to or greater than the proposed amounts, including at least 2.1 billion gallons for biomass-based diesel in 2018 and 2019.” The full Pruitt letter is available here.
Aside from a certain court challenge, we do not believe this is the end of efforts to change the RFS.
First, politics cut both ways on the RFS issue. The last thing the Trump Administration wants is a bankrupt or closed refinery on its watch. The Philadelphia Energy Solutions (PES) refinery in Pennsylvania is on the brink of bankruptcy, and EPA’s 2018 RFS could be the push that sends the plant into closure as soon as next Spring. The closure would result in job losses for about 1000 steelworkers and potentially higher gasoline prices. It would present a mess for the Administration in a key Trump state and force some kind of policy response.
Second, the refiners are not in any position to relent on efforts to get RINS relief so we expect them to propose alternative ideas for EPA to consider and at a later time when key agency nominees are not being held hostage by Iowa Senators.
Third, we also believe that the hardball tactics by the Iowans will prompt RFS opponents to restart efforts on a RFS repeal bill. In the past, EPA has been able to make regulatory changes that provide relief to refiners and take the momentum out of the repeal effort. But the Pruitt letter changes that equation.
Indeed, RFS supporters have won Rounds 1, 2 and 3 but their methods may backfire and lead to a different result in future rounds in the courts. We also think there will be continued strong efforts to make RFS changes to address high RINS prices that could lead to further mixed policy messages by the Trump Administration. These mixed messages will be a moderating force on RINS prices.
But certainly today, the EPA message is one of supporting greater volumes of biofuels and higher RINS price.
