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Report Calls for Long Term Suspension of RFS

20 September 2012

US - A report released this week by EPRINC - the Energy Policy Research Foundation Inc - an oil industry-funded research group, suggests a multi-year suspension of the Renewable Fuel Standard (RFS) could reduce US ethanol use by more than half.

To offset this loss in ethanol supplies, the EPRINC paper suggests a variety of options ranging from increasing gasoline (petrol) imports to reducing diesel fuel and heating oil production in an attempt to extract more gasoline from crude oil.

The EPRINC report says that a short term waiver of the ethanol mandate of six month to a year would do little to change the demand for corn for ethanol.

"A longer term waiver (two to three years) at some level at or below the blendwall would allow for a proper assessment of the nation’s crop situation, provide end-users with a stable planning environment, and permit refining operations to adjust fuel output. Such a waiver would likely reduce corn prices, providing economic benefits in the form of feed and food prices, and would reduce the risk of a price spike in gasoline as obligated parties begin blending ethanol at levels above 10% of the gasoline pool," the report says.

The report adds: "A multi-year waiver of both the ethanol and biodiesel mandates would free millions of acres of land for food and livestock uses, even after accounting for a decline in DDGS production. As previously stated, a full and long-term waiver of the RFS would not reduce ethanol use to below 400,000 bbl/d. Current biodiesel production, however, would be almost entirely eliminated. More importantly, a multi-year waiver could free over 18 million acres of existing farm land for the production of crops to meet market needs for food, livestock feed, exports, or fuel."

However, the Renewable Fuels Association (RFA) has attacked he rport as attempting to tear down the RFS.

The association says that the EPRINC report actually underscores the importance of the programme and highlights the lack of sensible or economic options available to refiners if ethanol use is severely curtailed.

“If you do away with the RFS over the long term and less ethanol is available, as EPRINC is suggesting, you leave a gaping hole in the gasoline supply,” said RFA President Bob Dinneen.

“The options available to fill that hole just don’t make economic sense and would further increase fuel prices for consumers. Ironically, the EPRINC report actually underscores why the RFS is so important; it highlights the fact that cutting ethanol out of our gasoline supply would result in increased dependence on imported oil and refined products, or would force refiners to make a choice between maximizing gasoline or diesel production. Consumers lose in either case. Clearly, the best option is not to tinker with the RFS and let it continue to work as intended.”

Mr Dinneen said there are other major flaws in the new EPRINC report, such as internal inconsistencies regarding the report’s characterisation of the flexibility of the RFS.

He said that on one hand, the report states that the RFS has “created inelastic demand for ethanol,” but then on the other hand, it acknowledges that ethanol production has plummeted by about 15% since the beginning of the year “…as high corn prices have caused many ethanol producers to idle production.”

“They call the RFS ‘inelastic’ but then point out that the ethanol industry has adjusted quickly to higher corn prices by reducing production,” Mr Dinneen said.

“EPRINC clearly misunderstands the flexibility that is inherent to the RFS programme that is allowing the ethanol industry to respond rationally to market signals.”

Mr Dinneen added that recent projections from both USDA and FAPRI show the ethanol industry reducing its corn consumption in 2012/13 more than the livestock feeding industry.

Further, the EPRINC paper repeats illogical criticisms of a series of studies by the Center for Agricultural and Rural Development (CARD) that show ethanol significantly reduces gasoline prices. Specifically, the report parrots critiques of the CARD study originally made by an economist at MIT, who previously received funding from Chevron. The CARD economists responsible for the research on ethanol’s impact on gas prices responded strongly to the MIT criticism here and here.

Finally, Mr Dinneen noted that the EPRINC report demonstrates an obvious lack of understanding of the role of animal feed co-products produced by ethanol facilities.

Further Reading

- You can view our report on the EPRINC study by clicking here.

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