As expected, the U.S. Environmental Protection Agency (EPA) issued proposed rules on Friday to reduce the amount of ethanol required to be blended with gasoline in 2014. After a 60-day comment period the EPA will publish final rules that may incorporate some of the comments it receives. The proposed reduction represent a huge win for oil refiners and a nasty blow to ethanol producers and farmers.

The Energy Independence and Security Act of 2007 mandated production and blending of 18.15 billion gallons of biofuels in the U.S. motor fuel supply for 2014. Of that total, 14.4 billion gallons was slated to be corn-based ethanol. The EPA’s proposed rules cut the total amount of required renewable biofuels to 15.21 billion gallons, of which 12.7 billion to 13.2 billion gallons would be corn-based ethanol.

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When the 2007 law was enacted, the Energy Information Administration (EIA) estimated that demand for gasoline would reach 154 billion gallons in 2014. The most recent estimate sets demand at just 133 billion gallons.

That means that the mandated supply total of 15.21 billion gallons would exceed 10% of all the motor fuel expected to be sold in the U.S. next year. Thus refiners are faced with making a fuel blend that is more than 10% ethanol or buying renewable fuel credits, called RINs, to offset the amount of renewable fuel they did not mix with their gasoline. This is what the industry calls the “blend wall.”

The EPA claims it has the authority under the 2007 law to scale back the mandated volumes in certain situations, including inadequate supply or economic hardship, but an ethanol industry group, the Renewable Fuels Association (RFA), disputes that and has fought hard to retain the original volumes. The association managed to get the EPA to approve an ethanol blend of 15% (E15) for use in U.S. cars, but adoption of E15 has been virtually non-existent because consumers won’t buy it.

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Who wins and who loses? Valero Corp. (VLO) is both an oil refiner and an ethanol producer. In its most quarter, the company’s ethanol segment posted operating income of $113 million compared with a loss of $73 million in the same period last year. That amounts to about 7% of the company’s total quarterly operating income of $1.7 billion. prices led to better margins. In general, all refiners win because the they won’t be required to buy RINs to offset lower ethanol blending.

Ethanol producers and farmers are the losers and the RFA is steaming mad. The group claims that the “EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies.” Producers like Archer Daniels Midland Co. (ADM), Pacific Ethanol Inc. (PEIX), and The Andersons Inc. (ANDE) don’t have an oil refining business to offset the proposed cuts to ethanol volumes.