In his recent Seeking Alpha article, analyst Tristan R. Brown highlighted that U.S. oil refiners and other fuel producers have seen their market capitalizations mostly wiped out in recent weeks as the COVID-19 pandemic has taken hold in the U.S. The market is clearly concerned that an extended period of social distancing will continue to have a very negative impact on U.S. refined fuels demand. The outlook for refiners is heavily contingent on the duration of the social distancing measures that have been implemented in response to the COVID-19 pandemic. The optimistic, if increasingly unlikely, scenario is that the number of U.S. cases will peak later this spring, at which point social distancing measures would be rolled back and Americans would likely resume their normal activities.
On March 6, Reuters reported that U.S. biofuel credits slump on expectation the U.S. Environmental Protection Agency (EPA) will appeal the refinery waiver ruling. The administration had until the end of March 24 to file a challenge. U.S. renewable fuel credits fell more than 15%, traders said, after news the Trump administration plans to appeal a federal court decision that cast doubt on a program exempting small oil refineries from biofuel blending laws. However, as the deadline approached, the Trump administration has decided not to proceed to appeal the court ruling that would sharply reduce its use of waivers exempting refineries from the nation’s biofuels regulation. The news is a blow to farmers and biofuels advocates, who claim the exemptions hurt demand for corn-based ethanol. The oil industry rebuts that claim.
Renewable fuel blending credits, or RINs, which refineries must earn or purchase to show compliance with the U.S. Renewable Fuel Standard (RFS) has created a valuable market for corn, but which refiners say is too costly. In July 2019, the U.S. Environmental Protection Agency (EPA) proposed requiring refiners to blend 20 billion gallons of biofuels into their fuel in 2020, up from 19.92 billion gallons in 2019. The proposed mandate includes 15 billion gallons of conventional biofuels like ethanol, unchanged from 2019. It also includes 5.04 billion gallons of advanced biofuels, like those made from agricultural wastes, up from 4.92 billion in 2019.
Since the adoption of the RFS, the U.S. Environmental Protection Agency (EPA) has granted waivers to small refiners exempting them from their obligations if they prove compliance would cause them financial distress. Reuters reporting has shown that the Trump administration has roughly quadrupled the number of exemptions since it took office in January 2017. U.S. Ethanol producers say the industry has suffered from the Trump administration’s expanded use of waivers to exempt oil refineries from blending ethanol into gasoline. Some 13 plants had shut down since November 2018, while others had temporary reduced production. The biodiesel leaders claimed that the biodiesel industry has also been hurt by the waivers, not just the ethanol industry.
In January, the 10th U.S. Circuit Court of Appeals challenged the program, saying the EPA overstepped its authority by granting those waivers. After the court decision, prices for renewable fuel credits skyrocketed, at one point gaining around 250%.
Recent article by Reuters pointed out that the decision by the Trump administration not to appeal the court ruling appears to end a years-long battle between the rival oil and corn industries, two crucial political constituencies for President Donald Trump, over the waiver program. Refiners argue the waivers are crucial to keeping small refining facilities in business, but agriculture representatives say they have been overused and hurt farmers by eroding demand for corn-based ethanol. The stakes have only grown recently, as both industries are hard-hit by the economic impact of the coronavirus pandemic. It is becoming increasingly likely that U.S. refiners and other fuel producers will soon find themselves in an operating environment that is without precedent.
Prepared by: Zainuddin Hassan
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