Elaine Kub

Elaine Kub

This midterm election cycle elevated a multitude of policies affecting American industries. In the Midwest, in particular, those discussions largely focus on the future of the Renewable Fuel Standard (RFS) — a program requiring corn ethanol and other domestically produced biofuels be blended into the U.S. fuel supply.

In South Dakota, we are all too aware of the ongoing debate surrounding the RFS and the constant efforts to reform the program. First, oil refiners, responsible for buying blending credits called Renewable Identification Numbers (RINs) are now struggling to comply due to increasing RIN prices. Second, biofuel stakeholders remain concerned about the industry’s ability to continue to drive demand for ethanol. To address demand concerns, the Environmental Protection Agency (EPA) recently allowed E15 blends to be sold year-round. However, this is only a small, short-term win for the ethanol community, and the Trump Administration continues to pursue changes that appease both oil and ethanol.

The latest issue to arise through those efforts regards the Administration’s recent decision to allow an increase in small refinery exemptions (SREs). These exemptions are granted to refiners that would encounter “disproportionate economic hardship” due to RFS blending requirements. Biofuel stakeholders claim the recent increase in these exemptions harm ethanol demand. However, economists examining the impact of these refinery exemptions refute that conclusion.

A recent study by University of Illinois economist Scott Irwin shows that ethanol blend rates haven’t budged despite the increase in refinery waivers. He states, “If there has been any ethanol “demand destruction” to date it was very small, perhaps a drop in the ethanol blend rate of a tenth, which equates to only about 140 million gallons of ethanol consumption on an annual basis.” Irwin goes on to say that the reason for this negligible impact is that “all but a tiny sliver of ethanol in the U.S. is consumed in the form of E10 and the price of ethanol in recent months has been very low relative to gasoline. The price competitiveness of ethanol in E10 means that the conventional ethanol mandate is non-binding up to the E10 blend wall.”

While these studies prove that SREs are not directly affecting ethanol demand in its most common form, they do highlight a larger long-term issue that impacts both ethanol and oil stakeholders as well as consumers. Unlike E10, higher ethanol blends are not price competitive without a subsidy, but RINs provide the financial backing needed to incentivize drivers to purchase E15 and E85 blends. However, a second SRE study found that these exemptions have led to a decline in the price of RINs. If SREs continue to drive down RIN prices, it could eliminate the incentive to consume higher ethanol blends above the E10 blend wall and significantly reduce demand for E15 and E85.

Put simply, SREs have not stifled ethanol demand for E10 but could contribute to a decrease in demand for E15 and E85 in the future. Still, SREs are not the real problem. The larger issue is that the RFS program is no longer driving demand for ethanol and becomes less sustainable with each new short-term fix that’s implemented. It is time for industry stakeholders to admit that the RFS is no longer the best avenue to boost domestic fuel markets and our current approach to RFS reform is failing. Instead, the oil and biofuel industries must come together and work with members of Congress to produce a viable long-term solution that improves market viability and benefits all stakeholders involved.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made.”

(1) comment

Tom Blazek

I would like to comment on this article regarding ethanol demand being "only slightly down" from last year. Looking at plain numbers on ethanol demand that may be true but that is not the whole picture. During 2017 gasoline demand was falling. Average gasoline demand during 2017 fell by approximately -87,000 barrels per day from demand in 2016. Yet during 2017 in a falling gasoline market ethanol demand was increasing over 2016 by approximately +7,600 Barrels per day. So, you have to ask yourself in 2017, why was ethanol demand growing in a shrinking gasoline market? Now in 2018 the gasoline market has been increasing. Gasoline demand is up this year by approximately +54,900 Barrels per day, so we need to answer the real question, why would ethanol demand fall by approximately -9,000 Barrels per day in 2018 in a rising gasoline market? I suspect it has something to do with 49 Refinery waivers over the last two years and D-6 RIN prices falling from around 80 cents per gallon to 8 cents per gallon.

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