Ethanol demand has suffered little due to EPA’s recent approvals of small-refinery exemptions (SRE) to the Renewable Fuel Standard (RFS), a new analysis from a University of Illinois (UI) economics professor finds.
Study author UI economist Scott Irwin tells DTN/The Progressive Farmer he didn’t expect the results he found in analyzing data.
“Yes, I was a little surprised,” he says. “When the entire ethanol industry is arguing in the direction of demand destruction, you have to think that something is going on. This is the first time that SREs have come into play in a major way, so you don’t know ahead of time exactly how everyone will react in the market. It’s also why I waited a few months to chime in until I thought I had sufficient data to say something credible.”
SURPRISE RESULT. The analysis may be a ray of light for farmers who are concerned about losing demand for their products because of a variety of trade issues and continued changes to the RFS, lower commodity prices and lower farm incomes.
The EPA granted a total of 49 such waivers for 2016 and 2017 renewable volume obligations. The EPA says in its latest RFS volumes proposal that it waived a total of 2.25 billion gallons those years. New EPA acting administrator Andrew Wheeler has indicated the agency will continue to consider future waiver requests in the same manner.
“There is little, if any, evidence that the blend rate for ethanol was reduced as the waivers went into effect,” Irwin concludes in an analysis.
“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. This may seem counterintuitive given the magnitude of the impact of SREs in reducing the conventional ethanol mandate and the precipitous drop in D6 RINs [renewable identification numbers] prices that followed.”
The study says the reason for that is most ethanol consumed in the United States is in the form of E10 and ethanol prices in recent months have been “very low” relative to gasoline.
“The price competitiveness of ethanol in E10 means that the conventional ethanol mandate is nonbinding up to the E10 blend wall,” Irwin says.
FUTURE PRESSURE. Although the numbers show little change in ethanol demand so far, Irwin says that may not be the case going forward.
First, he explains, if ethanol prices increase sharply as a result of corn supply problems, “Then ethanol could become expensive enough relative to gasoline that the conventional mandate would become binding even for E10.” Irwin says, so far, ethanol prices have been relatively cheap compared to gasoline.
So, small-refinery waivers could lead to some destruction of physical demand for ethanol.
“Second, SREs have, in all likelihood, reduced the demand for ethanol in the form of E15 and E85,” Irwin writes. “While the magnitude of this impact is very small at the present time, it also means that further expansion of the demand for higher ethanol blends is not in the cards so long as SREs are granted (and not reallocated).”
BLENDING INCENTIVE. Renewable Fuels Association executive vice president Geoff Cooper says the waivers have led to a drop in the price of RINs, which has hurt ethanol prices.
“So, now the ethanol-gasoline spread must do more of the work to provide the economic incentive to blenders to continue blending ethanol,” he says. “In other words, the economic incentive to expand blending that was previously shouldered by the RIN must now be shouldered primarily by the ethanol-gasoline spread. This results in artificially low ethanol prices and highly compressed margins--also known as ‘economic harm’--for ethanol producers.”
Cooper says the purpose of the RFS is to drive growth in renewable fuel use annually. The “proper comparison” is to examine the current ethanol blend rate compared to what it would have been without the exemptions.
“Back in January, EIA [U.S. Energy Information Administration] projected the annual blend rate would be 10.26% for 2018 and FAPRI [University of Missouri Food and Agricultural Policy Research Institute] projected it would be 10.29%,” Cooper says.
“But, since February, when news of the SREs started spreading, the blend rate has averaged just 9.85%. That difference amounts to about 700 million gallons of ethanol demand annualized--how can anyone argue that isn’t demand destruction?”
Irwin’s analysis is consistent with a new analysis by Charles River Associates.
“The SREs announced in the past 18 months may have contributed to the RIN price decline, but they have not impacted the incentive to blend ethanol up to the blend wall and, therefore, have not eroded ethanol demand,” the Charles River Associates study says.
“We verified this finding with an analysis of historical and recent blend rates, which have not shown the drop cited by opponents of SREs. Therefore, SREs have provided relief to small refineries while not impacting ethanol volumes blended into motor gasoline. In fact, the volume of ethanol blended continues to rise.”
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