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President Trump traveled to Cedar Rapids, Iowa on Wednesday for another campaign-style rally and proclaimed that “we’re saving your ethanol industries in the state of Iowa just like I promised I would do in my campaign.” We expect that off-script comment is a signal that a pro-ethanol Renewable Fuel Standard (RFS) will be proposed by his Administration next week.
Both Bloomberg and Politico have reported that the Environmental Protection Agency’s (EPA) proposed RFS for 2018 will maintain the Obama Administration’s RFS policy that compelled higher ethanol and other renewable fuel volumes. The law requires a proposed rule by June 30 followed by a public comment period with EPA finalizing the rule by November 30, 2017.
EPA has not made any public announcement on the RFS yet but recent higher RINS prices indicate the market is expecting a pro-RFS rule.
Since it will be the first RFS of the new Trump Administration, it will be highly significant as it may provide signals of how the administration views ethanol policy, RFS repeal efforts in Congress as well as a potential change in the RFS obligated party for compliance that is being advocated by independent refiners.
According to media reports, EPA will propose to require refiners to blend 15.0 billion gallons of conventional ethanol in 2018 – the same amount as the Obama Administration proposed for 2017. The statutory requirement for 2018 is 15 billion gallons but EPA has the authority to waive it and propose a lower volume. For example, the statutory requirement for 2015 and 2016 was also 15 billion gallons but Obama’s EPA final ethanol RFS was 14.05 and 14.50 billion gallons respectively.
In addition, EPA will propose 4.38 billion gallons of advanced biofuel in the 2018 RFS, an increase of 100 million gallons from 2017 according to media reports. No volume amount has been reported yet for cellulosic biofuel, but based on these reported numbers we would estimate the amount to be about 400 million gallons. The 2018 biodiesel volume was already finalized last year by the Obama Administration at 2.1 billion gallons.
With such specific numbers being reported in the media, it’s clear the proposed RFS is in its final stages. Press reports suggested that the RFS would be released at the end of last week. So why the delay in the official announcement? Bloomberg provided an update last weekend that EPA is now reevaluating the volume requirements for cellulosic biofuel “amid oil industry concerns that the targets might overstate (its) potential production.”
Several media organizations had reported that EPA had sent the proposed rule to the White House last month for review, and OMB had approved it for release. But we believe the current delay now comes from top. Over the last few weeks, EPA Administrator Scott Pruitt has been traveling to international meetings and prepping for budget hearings and has only recently reviewed the proposed RFS and promptly put the brakes on its release. This would conform with media reports about a reevaluation of cellulosic biofuel volumes but Pruitt, a former Oklahoma Attorney General, is quite familiar with the RFS and may also be concerned about other volume requirements.
Still, the politics may be pushing the administration to take a more pro-ethanol RFS position. Iowa was one of several corn-belt states that President Trump won in the election, and there are several influential RFS proponents at the Agriculture Department, the White House and even EPA.
It may not be possible for Pruitt to make any new changes to the proposed RFS after it has already been approved by the White House. We think the likely scenario is that the proposed rule is released in its current form. After the public comment period over the next several months, EPA will be able to revise the volumetric requirements in the final rule in November (as the Obama Administration did last year). We suspect there will be minor adjustments unless Pruitt is able to prevail in the inter-agency process over the next several months.
If it holds, ethanol producers will be pleased by the proposal RFS but refiners and the petroleum industry will be strongly opposed as it will increase costs and require volumes above the so-called 10 percent blend wall.
In the past, EPA has waived the statutory requirements to keep volumetric requirements at 10 percent ethanol blended into gasoline consumption. 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.
According to the EIA’s recent June 6 Short Term Energy Outlook (STEO), gasoline consumption for 2018 will be 143.6 billion gallons. Based on the EIA forecast, ethanol volumes for 2018 should be closer to 14.36 billion gallons if EPA wanted to adhere to the 10 percent blend wall. Instead, media reports suggest the agency has busted through the blend wall with its proposed 15.0 billion gallons. Moreover, 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.
We would not draw any conclusions about a possible EPA change in the point of obligation for RFS compliance that is being sought be merchant refiners. If media reports are accurate on the proposed RFS, corn state politics may have shifted the Administration’s view on ethanol and the RFS. On the other hand, a pro-ethanol RFS may also give the Administration room to maneuver and change the point of obligation. Politics also cuts the other way, and the last thing this White House wants is a Pennsylvania refinery to close as a result of its regulatory policy.
