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Ethanol Investors Cheer Scott Pruitt’s Departure

Scott Pruitt has stepped down as administrator of the Environmental Protection Agency (EPA). Pruitt’s tenure was mired in constant scandals, but he nevertheless had a big impact on environmental policies.

Below, I’ll explain why this is good news for the ethanol industry and what it means for energy investors.

Pruitt rolled back one of President Obama’s signature environmental accomplishments, the Clean Power Plan. This plan was designed to restrict greenhouse-gas emissions from the electricity sector, and was one of the factors that helped devastate the coal industry. Pruitt was also reportedly influential in getting President Trump to withdraw the U.S. from the global Paris Agreement on climate change.

Pruitt also proposed a freeze on fuel economy standards, and weakened a number of environmental regulations. His policies were extremely favorable toward the fossil fuel industry. The Wall Street Journal editorial page once noted about him “if there has been a more consequential Cabinet official, we haven’t seen him.”

Many are cheering his resignation, particularly environmentalists concerned with the direction he was taking the EPA. Andrew Wheeler, who was Pruitt’s second-in-command, will take over as the agency’s acting administrator. His successor isn’t expected to make a huge shift in direction, but he may not be as driven as Pruitt in rolling back environmental protections. 

The Ethanol Industry Celebrates

However, one group that is cheering especially loudly over the news is the ethanol industry. Pruitt had opposed the country’s Renewable Fuel Standard (RFS) as Oklahoma’s Attorney General, and he seemed focused on weakening the program as EPA administrator. 

The RFS established quotas of renewable fuels that have to be blended into the fuel supply, and an enforcement mechanism to ensure those quotas were met. This enforcement mechanism essentially transfers money from oil refiners to the ethanol industry, and is loathed by the nation’s refiners.

However, there is a hardship clause that is meant to protect small refiners that process less than 75,000 barrels of oil per day from “disproportionate economic hardship” under the RFS. Under Pruitt these waivers were liberally granted to refiners that requested them.

Pruitt’s usage of these waivers was a particular irritant for the ethanol industry and its supporters (such as Republican Iowa Senators Chuck Grassley and Joni Ernst). A waiver saves the refiner money, but it also lowered the value of the credits refiners must pay to comply with the mandate. That, in turn, weakens the ethanol mandate. 

The ethanol industry complained that waivers were being granted to refineries with multi-billion dollar owners. They argued that these waivers were only meant to apply to small refiners, and not to large corporations that typically would not have qualified for a waiver. They accused Pruitt of undermining the RFS with these waivers, and they sued the EPA as a result.

The ethanol industry hasn’t fared well under President Trump. Shares of ethanol suppliers Green Plains (NSDQ: GPRE), REX American Resources (NYSE: REX) and Pacific Ethanol (NSDQ: PEIX) have been battered since his election.

All moved higher on news of Pruitt’s resignation, in the hope that his successor will be more friendly to their industry. For ethanol-related equities, Pruitt’s departure is a tailwind.

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