As the U.S. prods the oil industry to blend more ethanol into gasoline, charges are flying between refiners and biofuel advocates about the impact of such mandates-and whether the so-called Blend Wall is really a problem at all.
Under a law passed in 2007, refiners are required to mix a certain volume of renewable fuels into their gasoline each year. Therefore, when gasoline use declines-as it is currently-it effectively increases the percentage of the mix that is made of ethanol.
As a 10 percent "blend wall" that is supposedly the safe limit for automobile engines approaches, supporters are pushing for a higher ethanol mix, while opponents raise objections related to cost and logistics.
Ethanol proponents, however, dismiss the "blend wall' as a self-inflicted controversy that the oil industry should have expected. They contend that falling gas demand was apparent back when standards were first implemented, and refiners never moved to adjust until it was upon them.
"They act as if they didn't see this coming," said Adam Monroe, president of Novozymes North America, a biotechnoloy company that makes biofuels. Given the onset of the 2008 recession that crimped gas demand, the blend issue "wasn't too hard to fathom," he said.
Ethanol makers, auto manufacturers and regulators all moved to adapt by advancing "a huge wave of innovation" by pushing new technology, such as making cars compatible with alternative fuels. Refiners, he said, were slow to adjust because of the impact on their bottom lines.
"Building a supply chain for this is no easy feat and it does take time," Monroe said. "But it doesn't take years and years ... this is not that heavy a technical lift for" oil companies, he added.
The oil industry has an entirely different take. It wants the ethanol blend to be lowered below 10 percent, arguing that any more would end up costing consumers at the pump.
Recrimination between the two camps has been heightened by E15, a even higher fuel blend standard of 85 percent gas and 15 percent ethanol. The American Petroleum Institute, the oil and gas industry trade group, calls the standards "unworkable," and has even considered arguing its case before the Supreme Court.
The Environmental Protection Agency and ethanol advocates contend E15 is safe for cars made after 2001. The gas industry says only a small subset of U.S. cars-approximately 5 percent of the 240 million in the country-can absorb that amount.
Ford (NYSE:F), General Motors (GM) and Chrysler did not immediately respond to requests seeking comment. Yet the AAA, the largest motor organization in the U.S., has tentatively sided with the oil industry's argument.
A 15 percent ethanol blend "is not yet ready for public consumption," said Michael Green, an AAA spokesman, in an interview. He said a higher ethanol blend was "likely to cause damage to autos," and could even result in consumer warranties being voided if they use the blend without knowing how it will impact their cars.
Right now, the E15 blend is available in limited supply in U.S. gas stations. Yet the day is approaching when ethanol mandates will be required to mix 36 billion gallons of biofuel into gasoline, by the year 2022.
"Government regulators have an obligation to suspend sales until those issues are addressed," Green said. Using E15 without fully educating the public would be "a mistake," he said.
-By CNBC's Javier E. David.
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