Agribusiness, Ethanol, & Refiners: ADM, AGCO, ANDE, AVRW, BG, BIOF, CF, CPOW, CNH, CALM, DE, HRL, GRH, KIOR, PEIX, MON, MOS, POT, REX, VRNM, VLO, SZYM, PPC, CZZ, DYAI, GPRE, MGPI, REGI, REX, STLK, MPC, TSO, CVX, XOM, HES, PBF, NTOIF
The Environmental Protection Agency (EPA) today released its proposed 2016 Renewable Fuel Standard (RFS) for 2017 using record gasoline demand as the driver to compel higher ethanol and other renewable fuel mandates next year. The law requires a public comment period on the proposed rule for the next several months with EPA finalizing the rule by November 30, 2016.
EPA is proposing to require refiners to blend 14.8 billion gallons of conventional ethanol in 2017 – an increase of 300 million gallons from 2016 and 750 million gallons more than 2015. The proposed ethanol RFS is just 200 million gallons shy of the statutory requirement of 15 billion gallons.
Summary of EPA’s Renewable Fuel Standards 2014-2017
While EPA is still below the statutory volume, ethanol producers should be pleased by the proposal today. The Obama administration has now reversed itself on the RFS having increased the volumes every year since 2014 when it proposed the now withdrawn 13.01 billion gallons ethanol mandate. With this new proposed RFS, EPA has now increased the required volumes by 1.8 billion gallons.
Refiners and the petroleum industry will be strongly opposed to the proposed RFS as it will increase costs and require volumes above the so-called 10 percent blend wall.
The ethanol producers and refiners were both unhappy with the 2014-2016 RFS finalized late last year and have file lawsuits challenging the rule. Likewise, we would expect both groups to file law suits after the 2017 rule is finalized later this year.
EPA has rationalized the higher RFS based on record gasoline consumption in the US this year. The agency likely contends that its 2017 proposed RFS is still within the 10 percent blend wall since more gasoline consumption means more room for ethanol blending volumes.
However, estimating gasoline demand and consumption is a dark art. Already we have seen the Energy Information Administration (EIA), International Energy Agency and OPEC re-adjust their oil and gasoline demand figures several times this year.
Regardless of the degree of difficulty, EPA has developed its own robust demand estimates and seemingly ignored the EIA estimates. Certainly, we can all agree that demand appears to be at record levels but EPA envisions an even rosier outlook than EIA.
According to the EIA May 10 Short Term Energy Outlook (STEO), gasoline consumption for 2016 will be 142.5 billion gallons. The STEO continues “in 2017, forecast gasoline consumption is close to its 2016 level” or 142.5 gallons.
Based on the EIA forecasts, ethanol volumes for 2016 and 2017 should be closer to 14.25 billion gallons if EPA wanted to adhere to the 10 percent blend wall. Instead, the agency has busted through the blend wall in 2016 with 14.50 billion gallons and in 2017 with this proposed 14.80 billion gallons.
The oil industry generally pushes for a 9.7 percent cap for ethanol blending of gasoline consumption to provide a cushion to the forecast data. Using the 9.7 percent formula, the 2017 proposed RFS would instead be 13.82 billion gallons – a billion gallon difference from the EPA proposal.
Biodiesel got another bump up in volume requirements to 2.0 billion gallons in 2017 and 2.1 billion gallons in 2018.