EPA proposes sales of higher ethanol blend gasoline

The US Environmental Protection Agency on Wednesday proposed a rule that would allow sales of gasoline with a higher ethanol blend in certain US Midwest states - a win for corn growers but a potential logistical challenge for the oil industry.

The proposal comes in response to a request from the governors of corn-producing Midwestern states including Iowa, Nebraska and Illinois, that the agency lifts an effective ban on E15, or fuel containing 15% ethanol, to lower pump prices and help farmers.

The EPA's proposal would take effect in the summer of 2024, a year later than the governors had requested.

The EPA enforces summertime regulations preventing E15 sales because of concerns it contributes to smog in hot weather. Research has shown, however, that E15 may not increase smog more than E10, which is sold year-round and contains 10% ethanol.

Proponents of the EPA's proposal say that increased E15 supply would lower pump prices by expanding the volume of available fuel, and help farmers in the meantime.

However, critics of the idea - including those in the refining industry - have voiced concerns that a piecemeal approach to augmenting E15 sales could lead to distribution challenges.

Both the biofuel and oil industries have said they would prefer a nationwide policy allowing E15.

The EPA will hold a public hearing for the proposed rule in late March or early April 2023, it said.

The American Petroleum Institute, an oil group, said major changes to the fuel infrastructure system will be needed to accomplish the governors' request, because high ethanol fuel grades require different equipment.

The API expects an additional one or two years beyond 2024 will be needed to minimize impacts to consumers, said Will Hupman, API's vice president of downstream policy.

The oil refining industry has traditionally balked at efforts to expand the ethanol market because it competes with gasoline at the pump and can be costly to blend.

The American Fuel and Petrochemical Manufacturers, an oil trade group, said late on Tuesday that implementing a new fuel blend in select states in 2024 would create issues, including leaving the Midwest region with tighter fuel supplies during the peak summer driving season.

"Not every refinery, pipeline and terminal serving the Midwest has the ability to seamlessly produce, transport and store a new blend of gasoline, and it could take years to permit and complete infrastructure projects to resolve this," said Patrick Kelly, AFPM's senior director of fuels and vehicle policy.

The rule could cost the Midwest's fuel supply chain and consumers up to US$800 million per year, Kelly added.

The biofuel industry gave a mixed response to the announcement.

The Renewable Fuels Association said it was glad to see the EPA taking action, but disappointed that it was a year later than the governors had requested.

"By law, EPA should have finalized approval of the governors' petition more than seven months ago, which would have given the marketplace more than enough time to adjust and prepare for implementation this summer," said Geoff Cooper, the RFA's chief executive.

Members of the biofuel industry say E15 saves consumers money. Drivers saved an average of 16 cents per gallon this past summer because of E15, said Growth Energy Chief Executive Emily Skor.

US President Joe Biden lifted the ban last summer to try to lower historically-high gasoline prices.

Some in the oil industry are so opposed to a piecemeal approach to E15, that in November they supported for the first time a bill to expand nationwide sales of E15.

The legislation was introduced by Senator Deb Fischer from Nebraska and Senator Amy Klobuchar from Minnesota and supported by the American Petroleum Institute.

Both oil and biofuel groups this week reiterated that a nationwide, legislative fix would be the best solution.

"A legislative approach that addresses the needs of all stakeholders would provide a more durable and less disruptive solution than creating requirements for costly new fuel blends," AFPM's Kelly said.

 

Pakistan's worsening current account deficit

Pakistan’s current account deficit (CAD) increased to US$567 million in October 2022, up 56%MoM primarily due to decline in remittances and imports.

CAD has reduced significantly on YoY basis from US$1.78 billion in October 2021. This is due to administrative measures to curb non-essential imports and reduced energy imports, lowering the trade deficit to US$2.3 billion (down 35%YoY and down 3%MoM).

Remittances witnessed a downward trend during the month to US$2.2 billion (down 9%MoM). The Balance of Payment position turned positive (US$1.2 billion) as Pakistan received US$1.5 billion loan from Asian Development Bank (ADB) in the last week of October.

Going forward, possible loans and international aid for floods rehabilitation, coupled with manageable CAD will likely provide external support to BoP position apart from US$1.0 billion international Sukuk payment which is scheduled in the first week of December 2022.

During October 2022, the trade deficit declined a mere 3%MoM to US$2.3 billion, largely owing to administrative measures taken to restrict import of non-essential items alongside 24%MoM decline in petroleum imports to US$1.2 billion. However, exports have also reduced by 7%MoM to US$2.3 billion. This is due to lower textile exports and PKR volatility, which likely refrain exporters from remitting proceeds to Pakistan.

Remittances declined in October 2022 to US$2.2 billion (down 9%MoM). Lower inflows from KSA, UAE and UK have reduced the overall base. The spread between actual and offered exchange rate coupled with active participation from informal channels dented remittance flows during the month. Looking ahead, less PKR volatility and increase in Pakistani worker registration in GCC countries may increase remittance flows in the remainder of FY23.

As per Board of Emigration and Overseas Employment (BEOE), around 693,000 Pakistanis have expatriated during 10MCY22TD compared to 288,000 and 225,000 during CY21 and CY20, respectively.

Most of these expatriations have occurred from Middle East countries which continue to enjoy better macros in high oil price environment.

The overall Balance of Payment (BoP) turned positive in October 2022 and recorded at US$1.2 billion against negative US$662 million last month. During October 2022, Pakistan received US$1.5 billion loan from ADB. Post these inflows Pakistan paid US$1.0 billion external debt repayment in the start of November 2022 while another international Sukuk payment of PKR1.0 billion is due in December 2022. Therefore, to support overall BoP and Foreign exchange reserves, Pakistan is in dire need of support from international organizations and friendly countries.

Apart from this, recent floods damaged extensive parts of Sindh and Baluchistan and displaced 15% of Pakistan population and 2.3 million homes have been affected. As per initial estimates of several agencies, total damages have so far reached US$40 billion and this will likely slowdown GDP growth to 2% as per recent estimates provided by World Bank. Pakistan is expected to receive additional assistance from international organizations and countries. We expect the pre-flood estimate of SBPs foreign exchange reserves of US$15 billion by end FY23 to remain broadly intact.

Do not blame OPEC for high energy prices

Policymakers, lawmakers and insufficient oil and gas sector investments are to be blamed for high energy prices, not OPEC told the producer group's new Secretary General Haitham Al Ghais to Reuters on Thursday.

The lack of investment in the oil and gas sector following a price slump sparked by COVID-19 has significantly reduced OPEC's spare production capacity and limited the group's ability to respond quickly to further potential supply disruption.

The price of Brent crude came close to an all-time high of US$147 a barrel in March, after Russia's ordering of troops into Ukraine exacerbated supply concerns. While prices have since declined, these are still painfully high for consumers and businesses globally.

"Don't blame OPEC, blame your own policymakers and lawmakers, because OPEC and the producing countries have been pushing time and again for investing in oil and gas," Al Ghais, who took office on August 01, said in an online interview.

Oil and gas investment is up 10% from last year but remains well below 2019 levels, the International Energy Agency (IEA) said last month, adding that some of the immediate shortfalls in Russian exports needed to be met by production elsewhere.

The OPEC official also pointed the finger at a lack of investment in the downstream sector, adding that OPEC members had increased refining capacity to balance the decline in Europe and the United States.

"We are not saying that the world will live on fossil fuels forever ... but by saying we're not going to invest in fossil fuels ... you have to move from point A to point B overnight," Al Ghais said.

“OPEC exists to ensure the world gets enough oil, but it's going to be very challenging and very difficult if there is no buy-in into the importance of investing," he said, adding that he hopes investors, financial institutions, policymakers as well globally seriously take this matter and take it into their plans for the future."

Oil has tumbled since March and Brent hit a six-month low below $92 a barrel this week. The slide reflects fears of economic slowdown and masks physical market fundamentals, Al Ghais said as he took a relatively optimistic view on the outlook for 2023 as the world tackles rising inflation.

"There is a lot of fear," he said. "There is a lot of speculation and anxiety, and that's what's predominantly driving the drop in prices."

Whereas in the physical market we see things much differently, demand is still robust. We still feel very bullish on demand and very optimistic on demand for the rest of this year."

"The fears about China are really taken out of proportion in my view," said Al Ghais, who worked in China for four years earlier in his career. "China is a phenomenal place of economic growth still."

The Organization of the Petroleum Exporting Countries, plus Russia and other allies, known as OPEC Plus, has unwound record oil output cuts made in 2020 at the height of the pandemic and in September is raising output by 100,000 barrels per day.

Ahead of the next meeting which OPEC Plus holds on September 05, Al Ghais said it was premature to say what it will decide, although he was positive about the outlook for next year.

"I want to be very clear about it - we could cut production if necessary, we could add production if necessary."

"It all depends on how things unfold. But we are still optimistic, as I said. We do see a slowdown in 2023 in demand growth, but it should not be worse than what we've had historically."

"Yes, I am relatively optimistic," he added of the 2023 outlook. "I think the world is dealing with the economic pressures of inflation in a very good way."

OPEC Plus began to restrain supply in 2017 to tackle a supply glut that built up in 2014-2016 and OPEC is keen to ensure Russia remains part of the OPEC Plus oil production deal after 2022, Al Ghais said.

"We would love to extend the deal with Russia and the other non-OPEC producers," he said.

"This is a long-term relationship that encompasses broader and more comprehensive forms of communication and cooperation between 23 countries. It's not just in terms of production adjustment."

 

Pakistan: Painful Path to Recovery

I am pleased to share with my readers a report by IMS Research. You may not agree with all the points, but it makes a good basis for an ‘Academic Discussion’. Pakistan needs a ‘home grown plan’ to overcome its inadequacies.

According to the brokerage house, FY23 Federal Budget saw the government attempt to widen the tax net, but the brunt eventually fell on the existing narrow tax base in the shape of higher corporate and personal taxes.

The benchmark index of Pakistan Stock Exchange (PSX) shed 3.6% (6.6% in US$), with turnover thinning out even further.

Foreign institutions and local insurance companies remained aggressive sellers. Pakistan is inching closer to the IMF program, but investor confidence remains low due to a sticky current account deficit, and ugly inflation prints around the corner.

That said, we believe risks are largely in the price, with default likely be avoided as the IMF agreement draws near. 

Inching closer to the IMF program

Pakistan has significantly reduced energy subsidies and sharply raised direct taxes. The 7th and 8th IMF reviews are reportedly being combined and Pakistan could see US$2 billion program resumption.

The FY23 Budget attempted to widen the tax net on real estate and retailers, but ultimately could not avoid further burdening the narrow tax base.

Most large corporates will now face additional 10% tax in in 2022, which reduces to a permanent +4% in subsequent years.

Improved fiscal discipline reduces the load on the monetary side but the State Bank of Pakistan (SBP) could yet raise rates on July 07, 2022 monetary policy, with the next inflation print expected north of 18% and international oil prices failing to come off. We expect an increase of 100bps, which will take the Policy Rate to 14.75%. This may be the last rate hike of the cycle though.    

Improving relations with others

Chinese commercial banks have recently disbursed loans of US$2.3 billion, negotiations are underway with Saudi Arabia to enhance the deferred oil payment facility, and UAE is reportedly interested in acquiring stakes in state-owned entities listed at the PSX.

Progress includes the appointment of a new US Ambassador to Pakistan for the first time since 2018, the visit of the German Foreign Minister, and a positive outcome in the recent FATF plenary with exit from the grey list looking likely subject to on-site verification.

A European Union mission also reached Pakistan to assess GSP+ compliance, and the broader improvement in relations with the West should help Pakistan’s case in our view.

The brokerage house assigns little probability to Pakistan procuring oil from Russia, even though local refineries have been asked to assess suitability, with political considerations likely to win out over economic ones.

Key risks

The government is digging in, going by its increasing willingness to take tough decisions and secure the IMF program. While coalition partners such as MQM have expressed discontent at the results of local body elections in Sindh, and PML-N rule is vulnerable in Punjab, it is difficult to envisage the coalition fracturing at this stage.

Imran Khan is a lot quieter but remains a uniting factor for the ruling parties, no matter their disparate nature.

For the economy, stabilization measures are underway and Moody’s decision to downgrade Pakistan’s outlook to Negative has not been matched by the other major credit rating agencies.

Corporate profits will hurt in the near-term, owing to the 10% super tax for 2022, but the impact on recurring profitability is modest. On market cap to GDP, Pakistan is cheaper than its Covid low and nearly as cheap as its trough during the global financial crisis.