Ethanol, Corn Prices, and RINs, Oh My!

What do ethanol mandates, corn prices, and renewable identification numbers have in common? The answer is the Renewable Fuel Standard that was first passed in 2005 and then increased in 2007 when the Energy Security and Independence Act was enacted, requiring specified annual amounts of corn-based and cellulosic ethanol to be produced and blended into gasoline. The outcome of this poorly conceived legislation is skyrocketing corn and food prices, a blend wall where ethanol blended into gasoline has almost hit its 10 percent share, and skyrocketing prices for renewable identification number (RIN) credits that refiners must purchase if they cannot blend the required composition of ethanol-based fuels. The next question is: If a law is having bad outcomes, why isn’t it being repealed, or at least fixed? Unfortunately, to some, these higher prices and demand limitations aren’t a concern; they welcome higher prices and intend to find ways to increase ethanol’s share regardless of what the ramifications are to our cars, boats, lawn mowers, weed eaters, and anything else with a small motor.

Corn Prices

Corn is the biggest U.S. crop and it is grown on more than 400,000 farms with a total area harvested for grain as large as New Mexico. About 40 percent of the U.S. corn crop is used to make ethanol.

Before the ethanol mandate became law, corn prices averaged less than $2.50 a bushel. Due mainly to growing demand by the ethanol industry, corn prices surged in 2008, around $7 a bushel. Although the recession lowered those prices, they rebounded strongly hitting over $8 a bushel last year, remaining above $6 a bushel for the past 2 years. Prices though have begun to fall due to the nearness of the blend wall and a very strong crop this year. The Department of Agriculture projects that this year’s corn harvest will total about 14 billion bushels, about 30 percent higher than last year’s harvest of 10.8 billion bushels and more than 10 percent higher than the corn harvest in 2011 of 12.4 billion bushels. The record crop is expected to bring corn prices down to around $4.25 a bushel, which is still 70 percent higher than before the ethanol mandate.[i]

Source: The Wall Street Journal

But these lower expected prices are coming too late for some. Feedlot operators, who fatten cattle for slaughter, are closing operations at escalating rates. Last year, about 2,000 of the nation’s 77,120 feedlots exited their business, up from 20 the preceding year. The number of feedlot operators has dropped 20 percent during the past decade with the biggest impact on small operators with less than 1,000 cattle.[ii]

Feedlot owners buy roughly one-year-old cattle that weigh about 750 pounds and feed them a corn-heavy diet for 6 months bringing their weight up to as much as 1,400 pounds at time of slaughter. Last year, feedlots with 1,000 or more cattle sold 24.95 million animals, 12 percent less than the 28.29 million sold in 2000. On average, U.S. feedlots have lost money for a record 27 straight months, with the losses equaling an average of $141 per head of cattle over that period.

Feedlot operators have been squeezed by rising prices for young cattle and high feed costs that have outstripped prices paid to them by meatpackers. U.S. beef consumption last year was 15 percent lower per person than a decade earlier.

Source: The Wall Street Journal

The Blend Wall Nears

Because gasoline consumption has declined since 2005 and is remaining fairly flat resulting from high gasoline prices, a weak economy with fewer people working and more mandated fuel-efficient cars, in order to use more ethanol as the renewable fuel standard requires, the share of ethanol blended into gasoline needs to be increased from its current 10 percent share. The Environmental Protection Agency wants to increase it to 15 percent. However, car manufacturers will not warranty their engines when they run on a blend higher than the current 10 percent ethanol. Further, there are other small motors and products that cannot even use a 10 percent blend without destroying the motor.

Renewable Identification Numbers

Under the Renewable Fuel Standard, oil-and-gas companies are required to blend biofuels such as ethanol with conventional gasoline. By 2022, the standard calls for 36 billion gallons of renewable fuel to be mixed with transportation fuels. If refiners cannot blend the required amount of renewable fuel (ethanol), they must purchase credits known as Renewable Identification Numbers (RINs) with each credit allowing a refiner to reduce its blend amount by a gallon of ethanol. The increased costs are passed onto distributors, who then pass it onto consumers.

Renewable Identification Number credits have escalated in cost from a few pennies last year to as much as $1.40 this year. Major refiners have had to spend hundreds of millions of dollars on them, passing along their additional costs by raising fuel prices. It is estimated that the cost to consumers is about 10 cents per gallon. According to the National Policy Research Association, by next year, when the renewable mandate will increase to 18.2 billion gallons from 16.6 billion gallons currently[iii], the purchase of RIN credits is expected to increase the price of a gallon of gasoline by 20 cents to $1.[iv] And, according to a study by NERA Economic Consulting, exceeding the blend wall could result in diesel fuel costs increasing by as much as 300 percent and a 30 percent increase in gasoline costs by 2015.[v]

Unless the law is repealed or changed drastically when the 2022 mandate is reached at twice the 2014 level, there will be a  large impact from these credits  on consumer prices. This is only exacerbated by President Obama’s corporate average fuel economy standards, which are doubling by 2025 to 54.5 miles per gallon, thus reducing demand for gasoline further.

Why the Law Is No Longer Needed

When the renewable fuel standard was originally passed in 2005 and and then quintupled (from 7.5 billion gallons to 36 billion gallons) in 2007, the expectations for the U.S. oil market were for declining production. The success of hydraulic fracturing and directional drilling has turned those expectations around to the point that the United States will soon become the world’s largest producer of oil. These new drilling technologies have increased domestic oil production by 1.3 million barrels per day between 2005 and 2012. Due mainly to the production increase and a decline in gasoline consumption, imports have declined by 3.1 million barrels per day since 2005. Net imports (imports minus exports) now account for just 40 percent of consumption, down from 60 percent in 2005, and are expected to decline to 34 percent by 2019, according to the Energy Information Administration.[vi]

Thus, the stated goals of reducing overseas oil imports that the renewable fuels mandate was supposed to meet by 2022 have been surpassed by developments that were unimaginable when the bill was passed.

Conclusion

The Maine House Republicans have summarized the renewable fuel issue well:

“[E]vidence is mounting that ethanol is a failure in virtually every way. It takes more energy to produce it than the fuel provides. Food supplies around the world have been disrupted because so much of the corn crop now goes to ethanol. It costs taxpayers billions of dollars in subsidies at a time when our nation is already $12 trillion in debt. Even environmentalists have turned against it; research shows that ethanol production increases the amount of carbon dioxide released into the atmosphere.”

What’s missing from the above statement, however, is the increased cost Americans are now paying for their transportation fuels due to bad legislation. Because refiners cannot blend the required amount of renewable fuel into transportation fuels, they must purchase credits, which have increased by 2300 percent and which are passed onto distributors and consumers. Thus, our federal government has come up with what amounts to a hidden tax on gasoline!