Publications: The Petroleum Economics Monthly

The Blend Bump (February 2013)

Refiners are scrambling to satisfy the Renewable Fuel Standard (RFS) requirements as stipulated in the Energy Independence and Security Act of 2007 (EISA). They are desperately lobbying Washington policymakers, even threatening to export gasoline rather than sell it in the US. Meanwhile, E85, an orphan product, may become Cinderella. Firms that can market it may now be able to earn large profits.

More than two years ago, our October 2010 report, titled "The US Renewable Fuels Program: Potential Impacts," gave clients a detailed look at the RFS program. It also assessed warnings of the impending constraint refiners call the "blend wall" and then showed a way around it: E85 (a blend of fifteen percent gasoline and eighty-five percent ethanol). We return to the issue here. We show that the EPA regulatory program, which features marketable credits called RINs, will cause the E85 price to fall, stimulating greater buying and reducing the refiners' blend wall to a "blend bump." The sales increase will be a triumph of economics and marketing over the oil industry's obstruction.

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