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September 20, 2013
The oil industry has formally petitioned the EPA to reduce the Renewable Fuel Standard (RFS) volume requirements for 2014, arguing that the ethanol market is saturated. But now that corn and ethanol prices have dropped sharply on expectations of a bumper corn crop whereas petroleum prices have remained high, perhaps there is still room for the ethanol market to grow – without reducing the 2014 volume requirements. Lower-priced E85 and E15 blends can now offer consumers a much better deal at the pump than gasoline – if gas stations sell it at a competitive price. In August, the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers formally petitioned the EPA to reduce the overall volumes of renewable fuels significantly below the 18.15 billion gallons currently required to be blended into the nation’s fuel supply in 2014 by the RFS statute. Among the arguments, the industry says the gasoline market is already saturated, at 9.7 percent, with as much ethanol as it can consume (aka the "blend wall"). They want the EPA to reduce the overall blending volume requirements for corn ethanol, as well as advanced and cellulosic biofuels, by 3.35 billion gallons. The Obama Administration is now reviewing the EPA’s proposed renewable fuel volume requirements for 2014. The EPA’s final 2013 overall volumes require 16.55 billion gallons of renewable fuels to be blended into the U.S. fuel supply (a 9.74 percent blend). What should the EPA do? Is there really a blend wall? With the end of the 2012 drought, the USDA expects 2013 corn production to set a new record . As such, corn and corn ethanol prices have dropped sharply from a year ago. Petroleum prices, however, have not. Despite surging domestic production of petroleum, the price of gasoline at the pump remains high. The Energy Information Administration (EIA) attributes this to labor strikes in Libya which have reduced output from a significant global supplier, market jitters over political instability and violence in the Middle East, and a record level of "unplanned OPEC crude oil production disruptions." No matter how much petroleum the United States produces, the price consumers pay at the pump will remain linked to oil supply disruptions and threats around the world. Consequently, the gap between ethanol and gasoline prices (wholesale futures) has widened in recent months, with ethanol at least 30 percent less expensive than gasoline ($0.80 to $1.00 per gallon). The EIA reports ethanol is now less expensive than gasoline on an energy equivalent basis, as well. This price gap has opened a new opportunity for fuel retailers to market higher blends of ethanol (E85 and E15) and pass on the savings to consumers. If this happens, the ethanol "blend wall" will begin to shift well beyond ten percent of the gasoline market, and there will be no need for the EPA to reduce ethanol volume requirements due to market saturation. Consumers are apparently ready to buy higher blends of ethanol, if the price is right, according to a public opinion poll released this week . More than 80 percent say they would like to have the choice to buy higher E15 and E85 blends at their local gas stations. Selling more E15 and E85 at competitive prices may be better for some fuel blenders as well: it may be cheaper to sell more ethanol at a discount than to buy additional RINs. (Renewable Identification Numbers accompany each gallon of ethanol that is produced. EPA uses RINs to validate each blender’s compliance with the renewable fuel volume requirements. Fuel blenders may also save RINs and use them to meet compliance requirements in future years, or they can sell or trade them. This year, RIN prices spiked to over $1.00 apiece, but prices have moderated significantly since. A recent New York Times article investigated the possible role of Wall Street bank speculators in driving up RIN prices.) More than 8 million cars in the U.S. are equipped to use E85 (flex fuel vehicles). E85 is sold at about 2,350 filling stations, according to the EIA – most in the Midwest. Since ethanol prices have dropped, E85 sales were up 43 percent in Iowa in the second quarter, according to Platts . If that trend continues and occurs in other Midwestern states, the ethanol market could expand by another 500 million gallons per year or more. The E15 market could also expand rapidly at these prices. Over 60 percent of vehicles on the road today (2001 model year and newer) have been approved by the EPA and DOE, after extensive testing, to use E15. However, only a few dozen gas stations sell E15 today. This could change rapidly if the gap between ethanol and gasoline prices stays wide and if RIN prices stay high. A recent study for the USDA found that it would not cost gas stations as much as claimed by the oil industry to modify existing fueling equipment to sell E15. Full marketing of E15 could expand the ethanol market by another few billion gallons per year. This would leave plenty of room for the new, much more climate-friendly, next generation, cellulosic ethanol biofuels, which will soon be coming to market. For recent research on these topics, see the following papers from the Iowa State University Center for Agricultural and Rural Development:
For more information about RINs, see these recent briefs from the EIA:
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