Fuel Prices Could Increase if Corn-Belt States Win Battle Over Fuel Supply

If seven Midwestern state governors get their way, some Americans may end up paying more for their gasoline. The governors are pushing for increased use of corn-based ethanol, which could lead to higher gas prices.

The federal government is currently reviewing a request that, if adopted, would be beneficial for corn farmers in the region, including Iowa, which is a politically important state.

If the EPA implements its proposed changes to the summer gasoline blend, it could force oil refiners supplying the Midwest to provide a specialized gasoline grade and construct new storage tanks and other infrastructure. This would likely increase costs, which would be passed on to consumers. Prices at the pump are seen rising by at least 2 cents per gallon in affected states, according to a study by consultancy MathPro Inc., though some industry groups say the costs could be much higher.

Rising gasoline prices could undermine President Joe Biden's efforts to keep prices under control. The average cost of a gallon of regular gasoline has been creeping higher in recent weeks, gaining more than 19 cents in a two-week period ended Friday. A winter storm that disrupted oil refining may have contributed to the price increase.

This is the latest example of how Biden's desire to quash inflation is proving difficult to reconcile with other goals. For example, he has made repeated pleas to the oil industry to increase output to help guard against surging pump prices, but this has angered environmentalists and even the fossil-fuel producers themselves. US oil refiners have cited a number of operational and policy constraints, including capacity cuts made during the pandemic, as reasons why they could do relatively little to boost gasoline supply last year when fuel costs jumped.

The push to boost ethanol production in the United States is largely due to the special treatment given to E10 gasoline. E10 gasoline is the most common variety of gasoline in the US and contains up to 10% corn-based ethanol. It has been granted a federal waiver to exceed the limit on its volatility, which is a measure of how much it evaporates. This waiver is significant because it allows E10 to contribute less to air pollution.

The farm lobby would prefer consumers use E15, which as the name suggests, contains 15% ethanol. But despite having a similar volatility as E10, it doesn’t enjoy the same kind of exemption from summertime restrictions. That has effectively blocked sales of the higher-ethanol blend across much of the country during the peak summer driving season when elevated temperatures mean speedier evaporation. And while more than 2,800 US gas stations sell E15, the hassle of complying with the summertime limits has deterred other retailers from offering it.

In order to create a level playing field and give E15 a better chance, the Corn Belt leaders are trying to handicap sales of E10. The governors of Illinois, Iowa, Minnesota, Nebraska, South Dakota and Wisconsin petitioned the Environmental Protection Agency in April to stop giving E10 a partial waiver from air pollution curbs in their states. Ohio Governor Mike DeWine submitted a separate request later, while the governors of Kansas and North Dakota subsequently rescinded theirs.

The White House is reviewing EPA's draft response and could release it within weeks.

The EPA is not able to outright deny the governors' request, but can put off the change for a minimum of one year. If the agency decides that there is not enough gasoline supply, the delay can be extended for two more years.

Refiners and pipeline operators are lobbying the administration to delay the shift to cleaner-burning fuels until at least next year, arguing that a too-fast pivot could threaten short-term fuel supplies and lead to an even higher price spike.

According to Patrick Kelly of the American Fuel and Petrochemical Manufacturers, refineries typically reconfigure and adjust production in February and March to produce summer gasoline. This process takes time, so Kelly advises drivers to be aware of potential price hikes at the pump during this period.

Ethanol supporters argue that the oil industry is overstating the potential for disruption. "These are sophisticated companies that have been running these systems for decades," said Renewable Fuels Association head Geoff Cooper. "They know how to run multiple products through these systems and how to make changes quickly."

The EPA has attempted to extend the volatility waiver to E15 via regulation, but a federal court struck down the change after it was challenged by oil refiners. Legislation that would codify the change into federal law is unlikely to pass Congress in the near future.

Pipeline systems that are entirely contained within the Midwest and refineries that primarily serve the region would generally shift to the new specification, according to an ICF analysis. However, in-region refiners would have to find new markets for butane and other cheap, volatile hydrocarbons that lower the cost of gasoline.

The change could also isolate the Midwest's fuel supply from the rest of the country, much like what happens in California. This would make the Corn Belt states more dependent on refiners in the region and create a risk of supply disruptions when facilities undergo maintenance or outages.

The Midwest is expected to have more gasoline than it needs this summer, but it still relies on the Gulf Coast for swing supplies. In July, the Gulf Coast supplied as much as 11% of the Midwest's gasoline consumption.