Ethanol likely to stay even if mandate ends

Ethanol, the best-performing energy commodity this year, is cheaper than gasoline, encouraging refiners to use the biofuel even if President Obama's administration ends a requirement to do so.

A 44 cent-per-gallon discount to gasoline provides companies including Exxon Mobil Corp. and Valero Energy Corp. an opportunity to profit by blending the corn-based additive into fuel, while easing prices at the pump for consumers. Marketers may use ethanol as they look for the cheapest way to boost engine performance and reduce pollution.

The most severe U.S. drought in 56 years has prompted lawmakers from both parties to ask the Obama administration to suspend the mandate because of the potential impact on food costs. Ethanol will consume 42 percent of this year's corn crop, according to government estimates, up from 41 percent last year. The biofuel has been blended into more gasoline than ever this year, Energy Department data show.

"It's just ingrained in the supply and distribution and it's having a moderating effect on pump prices," John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by phone. "As long as they were still allowed to use it, most would. The lower price and just the logistics of taking it out, most would still use it."

The price of denatured ethanol has climbed 21 percent this year, more than the 16 percent gain for gasoline on the New York Mercantile Exchange.

Still, the biofuel is 14 percent cheaper than gasoline with which it's mixed.

A 2007 U.S. law enacted under President George W. Bush, known as the Renewable Fuels Standard, or RFS, requires refiners to mix 13.2 billion gallons of renewable fuels, such as ethanol, with gasoline in 2012 and 15 billion gallons by 2015.

Twelve Republican and 13 Democratic senators asked Environmental Protection Agency Administrator Lisa Jackson, who enforces the program, to suspend or reduce the country's ethanol targets in an Aug. 7 letter because of the drought.

That followed an Aug. 2 letter in which a bipartisan group of 156 U.S. lawmakers, led by Rep. Bob Goodlatte, R-Va., asked the EPA to cut the requirements.