After months of intense lobbying from rival quarters, Washington has proposed cutting the biofuels mandate for 2014 by 16% to 15.21 billion gallons.
This would be the first cut in biofuels requirements, which were ideally set to grow each year with incremental increases in renewable fuel targets laid out in a 2007 law.
For renewable fuel targets, this represents a major setback because not only is 15.21 billion gallons for 2014 much less than the originally intended 18.15 billion gallons, it is also less than this year’s mandate of 16.55 billion gallons.
Though the proposed cut is not as low as the oil industry was seeking (14.8 billion gallons), in part, this can be viewed as a lobbying victory for Big Oil; but there is more to it than that, including simple mathematics.
The current and future ethanol mandates were created back in 2005 with the Renewable Fuel Standard (RFS), at a time when gas demand predictions were expected to be different. Now we have better fuel economy and demand for gas that is increasing slower than forecast. In 2007, it looked like gas demand would continue to rise every year; instead, it peaked in 2008.
Beyond that, poultry companies are going bankrupt due to rising prices of feedstock as crops are diverted to ethanol. The rising costs of farming and egg production are taking their toll on states like Minnesota.
And then we have the “blend wall”—the wall the market will hit when it has more biofuels than can be blended with gas. For refiners, hitting this wall necessitates either exporting more or producing less, which in turn could lead to shortages or higher prices at the pumps when they are just settling down a bit.
On the other side of this divide we have the biofuels producers, and states like Iowa that are reaping the benefits of all that demand for corn. This has come along with new jobs. Iowa will certainly baulk at the proposed cuts because the bulk of US biofuels are made from corn, with soybeans, grasses, crop waste and Brazilian sugarcane playing lesser roles. For 2014, the new proposal is to cut biofuels from soybeans and Brazilian sugarcane to between 2 and 2.51 billion gallons, while it looks like corn-based biofuel will be cut from 14.4 billion gallons to between 12.7 and 13.2 billion gallons.
The Advanced Biofuels Association has likened the proposal to pulling the rug out from under the biofuels industry.
“Such a move will chill future investments necessary to produce large-scale quantities of renewable fuels that cut greenhouse gas emissions by at least 50 percent compared to gasoline,” says association president Michael McAdams.
Unfortunately, both sides are correct. The problem is that the RFS set it parameters too far ahead and predictions are a tricky thing. Flexibility is necessary and this is being learnt the hard way and will certainly have repercussions and this initial lack of flexibility—of RFS ranges—was a policy misstep on the part of the Environmental Protection Agency (EPA).
Now we have another two months to wait for the EPA to announce its final word on the issue and given the level of lobbying that has taken place so far, we could expect more changes at the eleventh hour.
This piece is cross-posted from OilPrice.com with permission.