CHICAGO (Reuters) - A month ago, Steve Walk was on the brink of deals to sell two big oil refiners some of his company's specialized oil pumps, which serve up fuel that is 85 percent ethanol, a biofuel made mostly from corn. Walk's company, Protec Fuel, sells and installs the equipment needed to dispense so-called E85. The deals would have nearly doubled Protec's business, he said. The number of stations across the United States dispensing E85, which is a rarity despite the growing use of biofuels, would have jumped by 10 percent. But those deals are on hold after the U.S. Environmental Protection Agency's proposal earlier this month to slash the minimum volume of ethanol to be used in the country's gasoline supply next year. The surprise move by the Obama administration marks a retreat from the 2007 Energy Independence and Security Act meant to push increased sales of biofuel. The proposal could be approved following a 60-day period for public comment. "It was just starting to get to the point where oil companies were saying, 'Fine, we'll start putting in alternative fuels,'" Walk, vice president of Protec Fuel in Boca Raton, Florida, said of deals he had in the works to build or retrofit pumps at some 450 stations. Now, those conversations have gone by the wayside. It's not canceled, but it's on hold. For Walk, an estimated $5 million in potential revenue hangs by a thread. But his stalled deal is just one example of the blows suffered by the nascent E85 industry, which has relied heavily on the road map laid out in the federal Renewable Fuel Standard (RFS) program. The regulation, supported by two U.S. presidents and designed to promote vehicles running on homegrown biofuel, could be slashed for the first time. While still vital to the $131 billion farm economy, ethanol is less of a priority in Washington as declining fuel demand, lower energy costs and booming North American oil production result in waning support for a biofuel program tied to becoming less dependent on foreign oil. E85 is the fuel that, in theory, could boost ethanol content in gasoline fast enough to meet a government-mandated target of selling 18.15 billion gallons of biofuels by 2014. Currently, the EPA caps the volume of ethanol in a gallon of gasoline for use by conventional vehicles at 10 percent (E10 fuel). But E10 has become so commonplace that refiners have run up against the "blend wall," the point at which the market is saturated with E10 fuel. With U.S. gasoline consumption at its current 133 billion gallons a year, the blend wall with a conventional 10 percent blend is 13.3 billion gallons of ethanol. In 2012, about 13.7 billion gallons of ethanol were consumed in the U.S., and 2013 production could top 14 billion gallons. Oil refiners complained that it is impossible to inject more ethanol into the U.S. gasoline pool without risking damage to engines or voiding some manufacturers' warranties. E85 represented a path to a compliance - and a way to boost revenue - with the Renewable Fuel Standard. By blending and selling more E85, which can be used in flex-fuel vehicles that can run on conventional gasoline or higher blends of biofuels, energy companies could have met higher biofuel quotas by, in effect, jumping over the blend wall. "If there were ever a time E85 might begin to move, it is now, and the EPA RFS level would remove any incentive to grow E85," said Wally Tyner, an energy economist at Purdue University in Indiana. Under pressure from the oil industry and from meat processors complaining that demand for corn-based ethanol is raising commodities prices, the EPA on November 15 proposed reducing the targeted amount of biofuel to be blended next year. The new target was set at 15.21 billion gallons of biofuel in the nation's fuel supply in 2014, down from the current mandate of 18.15 billion gallons. Corn growers, biodiesel companies and ethanol producers have blasted the EPA for caving in to the complaints. But no group relied more heavily on the biofuel mandate than those who market and sell E85. The EPA deal will not "kill (E85), but it will certainly stifle it," said Mike Irmen, vice president of commodities and risk for ethanol at The Andersons Inc, which runs four ethanol plants and is among the top sellers of E85. The government's proposal follows a bipartisan vote two years ago in Congress to strip $6 billion in subsidies from the ethanol industry. While companies such as The Andersons and Green Plains Renewable Energy Inc are expected to formally object to the proposal during the comment period, the market for ethanol credits, known as RINs, shows traders are figuring the EPA's proposal will move forward. Oil companies say there is scant demand for E85. "We're not opposed to anyone who wants to sell it," said Carlton Carroll, a spokesman for the American Petroleum Institute. However, some oil companies began considering installing E85 pumps earlier this year after the price of RINs surged nearly 3,000 percent, to a record $1.50, this summer on worries about meeting an expanded biofuels target next year. A RIN (short for Renewable Identification Number) credit is created for each gallon of biofuel produced in the country. Producers of the fuel can sell the credits to other energy stakeholders such as refiners or importers that purchase the RINs in order to come into compliance with the law's requirement for biofuel production. As RINs prices rose, the cost of investing in E85 systems began to make sense. So long as the fuel mandate was in place, a fuel blender could collect a large number of increasingly valuable RINs simply by selling the ethanol-rich fuel. Critics of the RFS program say the spike in RINs was a sign that the biofuel law was broken. Proponents countered that the higher cost of credits was the price producers paid for not building the infrastructure needed to dispense more biofuels. A reduced RFS would cut demand for RINs. Prices have fallen to around 25 cents, still higher than the 5 cents or so of last December, but analysts figure that price reflects the fact that some traders are guarding against the possibility of a successful legal challenge to the EPA proposal. "Definitely, if the current (EPA) proposal holds true, the RIN value will be essentially nothing, and that's what was really driving retail equipment investment and overall volume in E85," said Robert White, director of market development for the biofuels trade group the Renewable Fuels Association. Protec's Walk says RINs are a factor for his potential customers. They are "moderately interested, but if the RINs were higher, they'd be pulling the trigger." The number of fuel stations offering E85 has slowly grown from a handful in 1995 to more than 3,000 today, out of more than 100,000 fuel stations in the country. They are concentrated in Corn Belt states such as Iowa and Minnesota, where filling up with ethanol can be a political statement. Automakers, led by General Motors, can adapt a conventional car into a flex-fuel vehicle simply by adding extra equipment - enhancements in hoses, censors and fuel pumps - that cost a few hundred dollars. Customers in search of "green" transportation have shown interest in purchasing the vehicles. Some 15 million flex-fuel vehicles are on the road today, up from fewer than 1 million in 2000. But when it comes time to fill those vehicles, many drivers decline to gas up with E85 fuel. In large measure, that is because cars using the higher ethanol mix generally get about 25 percent fewer miles per gallon than they do with standard gasoline, due to the lower energy content of the blended fuel. For E85 to make economic sense for a driver, the fuel generally must sell at a discount of at least 25 percent from the cost of gasoline. The average discount this week across the United States was only 17 percent, according to the fuel monitoring website E85prices.com. The average E85 gallon was priced at $2.70, compared with $3.25 per gallon for gasoline, the website's data showed - making it more costly to run a vehicle on E85 despite its lower price. "The price difference is too small - 99.9 percent (of drivers with flex-fuel vehicles) fill up with gas," LMC Automotive analyst Mike Omotoso said of drivers. Biofuel boosters still hold out hope. E85 sales have increased more than 30 percent this year as the fuel became more widely available, according to a Renewable Fuels Association survey. An expanded RFS coupled with a record U.S. corn crop - 40 percent of which is used to make ethanol - would have made 2014 the fuel's best chance to succeed. Additional reporting by Karl Plume in Chicago; Editing by Peter Henderson, Grant McCool and Douglas Royalty