Thanks to the intervention of the Environmental Protection Agency (EPA), the torrid market for ethanol credits—a linchpin of efforts to inject more corn-based fuel into the U.S. gasoline supply—may finally be set to cool, helping to contain prices at the pump.
On Friday, the agency bowed to intense pressure and cut future biofuel mandates across the board. By effectively capping the gas-to-ethanol mix at its current level of 90-10 percent, the EPA helped refiners avoid running into a "blend wall"—the point at which refiners would have been adding more biofuel to gasoline than critics contend most automobiles are mechanically capable of taking.
(Read more: EPA proposes reducing ethanol mandate)
Goldman Sachs pointed out that the cap has an added benefit—reining in the volatile market for renewable credits, which had made it costly for gas producers to comply with requirements. Earlier this year, the market for Renewable Identification Numbers (RINs)—the credits refiners use to comply with biofuel guidelines—surged to a record high, helping to push up retail gasoline prices.
The EPA's shift creates "a new framework for setting the mandates where it actively manages annual targets by taking into account the capability to produce and blend biofuel, capping the upside to RIN prices," Goldman wrote in a research note on Monday. If the proposals pass muster during the 60-day comment period, the new framework would push prices down even further in the long term, the bank said.