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Ethanol usage rebounding in 2014

Few ag economists understand the complex details of the Renewable Fuel Standard as well as Scott Irwin at the University of Illinois. This fall, the EPA was expected to propose the size of the RFS for 2014, something that Irwin doesn’t expect until this month, at the earliest, because of delays caused by the shutdown of the federal government.

EPA has already said it may adjust the mandate down from levels in the 2007 Energy Law. For many reasons – the Great Recession, more fuel-efficient cars, teens not driving – gasoline use is falling, leaving less room in fuel tanks for it and ethanol. If EPA keeps ramping up the RFS, as Congress expected in 2007, something has to give. In recent years, EPA has cut requirements for cellulosic ethanol, since little was made. In 2014, Irwin thinks it’s possible that EPA may also write down requirements  affecting advanced biofuels such as biodiesel and imported sugarcane ethanol. “I think there’s a base that you can reasonably forecast,” Irwin says. “The mandate, at minimum, will accommodate 13 billion-gallon consumption of ethanol.”

The flatline for fuel

That would be about the same as this year’s EPA mandate that allowed 13.8 billion gallons of conventional ethanol. Corn used in ethanol maxed out with the 2010 and 2011 crops at about 5 billion bushels, a market as big as the entire U.S. livestock industry. Out of the drought-shortened 2012 corn crop, USDA says 4.665 billion bushels went into ethanol. For the 2013 crop, USDA projects 4.9 billion bushels.

“You’re capturing more than two thirds of the loss back. That’s a good recovery in a year,” says Chad Hart, an Iowa State University economist who also tracks ethanol.

Where we go from here is an economic and political battle. The American Petroleum Institute is suing EPA to roll back the existing mandate for the 2013 calendar year (affecting mainly the 2012 crop). EPA, under Big Oil pressure, had a draft for 2014 rules that would cut corn ethanol’s mandate to 13 billion gallons.

Bob Dinneen, president of the Renewable Fuels Association, counters that EPA shouldn’t lower the 2014 RFS. The Energy Law doesn’t give it that authority, except for a cellulosic ethanol shortfall, he says. It can issue a general waiver if the RFS would harm the economy. It has twice rejected waivers.

Dinneen cites analysis by Iowa State University economist Bruce Babcock that shows enough E85 pumps and flex-fuel vehicles use another billion gallons of ethanol, more than enough to hit the 14.4 billion-gallon corn ethanol mandate included in the 2007 Energy Law’s total RFS of 18 billion gallons in 2014.

Economics have favored E85 sales recently, but both Hart and Irwin are skeptical.

“You just pick a car at random out there in the U.S. countryside, and it’s not flex fuel,” Hart says. “I think we think we settle in here. I don’t see anything changing the industry a great deal.”

Three scenarios

Irwin had done a detailed analysis of how much ethanol might be made in 2014 and 2015 if one of three things happens:

  1. The EPA keeps increasing the RFS mandate (except for shrinking the cellulosic part to match production). He calls that the status-quo option.

  2. A write-down option keeps advanced biofuels frozen at this year’s level of 1.75 billion gallons. Corn ethanol would increase to 14.4 billion gallons next year and 15 billion gallons in 2015.

  3. A freeze option, which Irwin and economist Darrel Good have outlined, would keep the grain ethanol part of the RFS stuck at 13.8 billion gallons.

How each approach hits corn depends on whether biodiesel or E85 is used to increase demand for biofuels. If it’s biodiesel, corn used for ethanol would stay at or below USDA’s 4.9 billion-bushel forecast for this year’s crop. Using E85 keeps it at 5 billion bushels.

To learn more, search for Decision Time for the RFS here.

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