Another bit of fallout from the diving demand for gasoline is just about to hit the front pages. U.S. ethanol producers are approaching the so-called blend wall, a term that describes a situation where the 10% blend of ethanol with gasoline reaches its mandated limit. At that point, the value of ethanol collapses and producers begin agitating for a higher blending limit.

The four-week rolling average blending rate for ethanol in the United States reached 9.94% in the week ending October 10, according to Platts. The 10% blend rate was surpassed for one week in mid-September.

Ethanol blenders, including major independent refiners like Valero Energy Corp. (NYSE: VLO) and Tesoro Corp. (NYSE: TSO), in general like the low price of ethanol, which dropped below $1.60 a gallon earlier this month, less than half the price of a gallon of ethanol at its peak in August. Blenders took a beating in 2013 when corn prices skyrocketed, demand was falling and blenders bought renewable energy credits called RINs, bidding the price up from a few cents to more than $1.00.

Producers like Archer Daniels Midland Co. (NYSE: ADM) and Pacific Ethanol Inc. (NASDAQ: PEIX) are not so happy this year. The producers want the federal government to raise the federally mandated blending amounts for 2014. Refiners and blenders oppose raising mandated limits and sent a letter to the U.S. EPA outlining its case for leaving the mandated levels where they are:

EPA is now 10 months late in finalizing the 2014 rule. If EPA raises the volume requirements, the supply chain is unable to retroactively generate additional compliance credits for the first nine months of 2014. This problem will grow in 2015 as EPA continues to delay release of the 2015 proposed rule, compounding compliance challenges for obligated parties managing volatile and uncertain RIN markets,” according to the refiners’ letter. … Our industry does not oppose renewable fuels and is one of the largest investors in renewable technologies. However, technological and market limitations exist and consumers, not the federal government, should determine what goes in their cars.

Why this matters to consumers is that, if the EPA waits too long and increases the blending requirements — unlikely but possible — the scramble for RINs and more ethanol could undo some of the drop in prices we have seeing at the gas pump.

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