Are refiners in for a big surprise?
According to Saturday's Des Moines Register:
"The ethanol industry is fracturing and under attack inside and outside the Capitol. Theindustry's 45-cent-a-gallon subsidy is due to end at the end of the year, but energy bills that could provide a means of extending the tax credit have been delayed, throwing the legislation's future in doubt.
In the House, the tax-writing Ways and Means Committee is working on a plan to continue the subsidy for a year but cut it by 20 percent to 36 cents a gallon. Action on it also has been put off until September.
The 54-cent-a-gallon tariff on imported ethanol is also set to expire this fall, and the Brazilian sugarcane ethanol industry is expressing optimism Congress will cut if noteliminate it."
Gasoline refiners would still be required by law to purchase and blend 13 billion gallons of ethanol with gasoline in 2011 pursuant to the Renewable Fuel Standard enacted by Congress in 2007. Refiners, however, wouldn't receive a 45 cent pergallon tax credit if Congress allows the subsidy to expire.
The net effect of eliminating the subsidy is the cost the refiner pays for ethanol would effectively increase 45 cents a gallon. This would leave gasoline refiners and distributors with significantly lower operating margins.
The most important issue for the ethanol industry is what Congress does regarding the 54 cent a gallon tariff on imported ethanol which alsoexpires at the end of December.
If the current import duty is lowered or eliminated, imports of ethanol from Brazil would displace U.S. ethanol in cities within 150 miles of the major East and West Coast ports and along the Gulf states which includes most of the major population centers in the U.S.
If the import tariff on ethanol were eliminated, production of ethanol in the U.S.would fall more than 25%.
Nothing is certain in the world of politics, but if the subsidy is eliminated and the import tariff is not refiners could be in for a major hit to their margins.
If the subsidy is allowed to expire, but imports from Brazil are no longer taxed, it would be a boon for Brazilian ethanol companies and a major hit to the U.S. ethanol industry.