Summary
Even if the government cancelled, suspended or modified the Renewable Fuel Standard, industry would use a minimum 5.25 billion gallons per year just to meet federal, state and local requirements. Furthermore, given the current sales price of ethanol, there is great economic incentive to continue blending. Therer are two big losers if the RFS was cancelled or suspended. The first is the value of RINS would plummet to zero. The second is the biodiesel industry since the 2009 RFS requires the use of 500 million gallons.
Analysis
The current RFS requires the use of 9.0 billion gallons of renewable fuels in 2008. Note for 2008 this does not all have to be ethanol, and certainly not all corn based ethanol either. Prior to the enactment of the Energy Independence and Security Act of 2007, the 2008 standard would have been 5.4 billion gallons up from 4.7 billion gallons in 2007.
Using percentages of gasoline is dangerous. The figures cited in the article represent a calculation for the obligated parties with adjustments for Hawaii, Alaska and small refiners. The calculation is straight forward, it is available in the Code of Federal Regulations.
Suppose the RFS was cancelled tomorrow. What effect is there on gasoline blending? In areas where reformulated gasoline is used, i.e. major metro areas such as California, NY, Phila, Houston, Dallas, Chicago, ethanol is used as a gasoline blending component to meet the pollution emissions reduction prescribed by the EPA regulations. The quantity of ethanol used to meet this obligation is approximately 265,000 barrels per day or 4.1 billion gallons per year based on 3.1 million barrels per day of RFG sales. (Note California is NOT a required 10% ethanol market, 5.7% is the most common blend).
Then there are states that mandate 10% ethanol blends: Hawaii (with some slight adjustments), Minnesota, Missouri and Oregon. These four states add another 800 million gallons of ethanol demand.
Finally we have the mandated use of ethanol in the winter time for carbon monoxide non-attainment areas. These areas comprise locations such as Phoenix, Las Vegas, Denver and El Paso. That's another 350 million gallons on an annualized basis.
So the industry will use 5.25 billion gallons at a minimum. Current Ethanol values are approximately $ 2.90 in Chicago and $3.03 in NY. Against a NYMEX RBOB value of $3.50, it is clear that economics continue to favor ethanol blending throughout most regions of the country. If the RFS was cancelled, the blending that is in place would continue. I estimate that total ethanol consumption on an annualized basis is currently around 8.7 billion gallons per year. You can get most of this info off the EIA/DOE website and then make assumptions about some non reported ethanol blending.
Tthere would also be losers. First, the RIN market would collapse. The regulations define obligated parties as gasoline producers, blenders and importers with some exceptions for small refiners. The 7.76% cited in the article is the obligated parties RFS requirement. In order to track the use of renewable fuels and maintain compliance with the regulations, the EPA has developed the Renewable Identification Number or RIN to track RFS production, importation and usage. RINs currently have a value in the marketplace of 5 to 6 cents per gallon. No RFS means no RINs which in turn means no value.
The other loser, if the RFS is cancelled or suspended especially in 2009 is the biodiesel industry. the RFS mandates the use of 500 million gallons of biodiesel next year. No RFS means no biodiesel mandate on a federal level.
Although the refining industry willl continue on its present path, there is the possibility that if the RFS is changed, corn prices might fall. The USDA report on June 10, 2008 indicated a corn crop of 11.7 billion bushels with 4.0 billion or 34% destined for ethanol production. The futures market knows this very well and also anticiaptes higher consumption out forward. Now I realize that there are a whole host of other issues facing the corn crop, but one issue that would be removed is the increased demand for corn going forward for ethanol if the RFS is cancelled or modified.
Aalthough refiners will continue to use ethanol today, they will be reluctant to invest in new blending and distribution facilities going forward. The same can be said for independent terminal operators who rely on belnding commitments from their customers. No RFS, no requirement so the bottom line for a blend is whether or not its economical.
Bottom line: If the RFS goes away, don't expect the refiner/blender industry to immediately reduce their ethanol consumption. They need a lot of it, and the blending economics currently are there to use the rest of it.
