Keep your eyes on Washington
I recently mentioned that consumers should begin watching the price of E85 and E10 as we enter a period where fuels with higher blends of ethanol could have a lower cost on an energy equivalent basis. Prices are now within a few cents at my regular gas station in Fargo, ND, and there is at least one station in town where E85 is sold at a significant discount, which is more than enough for one to go out of his or her way to fuel a vehicle.
How long this situation persists depends on a number of factors. Among the most important is an Environmental Protection Agency (EPA) decision that is scheduled to be made by the end of the month. Before I get into the pending decision, a short refresher on the Renewable Fuel Standard is in order.
The Renewable Fuel Standard (RFS) is a federal law that was passed in 2005 and 2007 to support the development of a domestic renewable fuel sector and the use of biofuels. This development is supported by mandating the use of biofuels by type and year through 2022.
The RFS gives the EPA the flexibility to waive annually mandated levels if they would cause economic harm or if a domestic supply isn’t available. The EPA has used this power in previous years because the amount of cellulosic ethanol wasn’t available in adequate quantities. However, it also has turned down waiver requests, such as one made by the oil and gas industry in 2012. The industry claim was that the drought had reduced the corn supply drastically, and that without a waiver, economic harm would result because of higher food and fuel costs.
About a month ago, the EPA’s proposed 2014 RFS levels were leaked. The memo contains a 1.4 billion gallon reduction in mandated renewable fuel use, which in practical terms is corn ethanol. One billion four hundred million gallons is a lot of alcohol and requires 500 million bushels of corn. This is more than North Dakota’s production in recent years.
Some of this corn still will be used to make ethanol, used as feed, exported or be in a bin a year from now. The potential impact of a 1.4 billion gallon waiver is significant and bearish for corn.
The EPA’s reasoning behind the reduction is that the nation’s infrastructure and fleet cannot utilize the mandated level of ethanol. This is the blend wall issue again.
I find the reasoning difficult to understand. There are more than 10 million flexible fuel vehicles in the nation. Most people don’t use higher blends of ethanol at the thousands of stations that have the product available. Continued competitive pricing of higher blends of ethanol would move a lot of fuel.
There are a lot of heated conversations going on in Washington as groups make their case for different mandated levels. It makes sense for North Dakotans, especially those involved in agriculture, to pay close attention. — David Ripplinger, Bioproducts and Bioenergy Economist and Assistant Professor of NDSU Department of Agribusiness and Applied Economics