ANALYSIS: EPA 2021 blend proposals fail to staunch corn-ethanol fears

Signs of a slowdown in US gasoline supply earlier this week came as news surfaced the US government department in charge of the Renewable Fuel Standard (RFS) had settled its draft proposals for next year’s biofuel blending mandates.

On the face of things, it looks as though biofuels had won round one, as the Environmental Protection Agency (EPA) is thought to have proposed a higher overall mandate and an increased role for advanced biofuels.

That strongly hints that the conventional ethanol mandate will likely be held at the current 15 billion gallons, essential if the US is to remain on track to consume 132 million mt of corn over the 2020/21 marketing year to produce the road fuel.

But there is a long road still to navigate, and the fall in gasoline supply in Wednesday’s Energy Information Administration (EIA) report throws the spotlight for some back on to the key assumptions that will underpin a greater prize – the EPA’s final 2021 blending mandates.

“What we don’t know is what EPA assumed for forecast total motor fuel plus diesel demand for 2021, or if they went back to putting zeroes in for projected small refinery waivers,” Seth Meyer, research assistant professor at the University of Missouri told Agricensus.

“So, while the ‘leaked’ total number is interesting, until you have the rest of those bits it is hard to interpret,” Meyer, a former head of the USDA’s world agricultural outlook board, said.

Reuters and Bloomberg both reported the EPA had proposed to increase both advanced biofuel mandates and the overall blend mandate by 80 million gallons to 5.17 billion gallons and 20.17 billion gallons respectively, although the EPA has declined to comment.

It raised hopes that the bulk of US biofuel blending – supplied via corn-based ethanol – will be unchanged, but the leak sparked a strong response from the conventional oil sector – itself wrestling with an unprecedented plunge in energy demand.

“Increasing the RFS mandate ignores the significant impact of Covid-19 mitigation efforts on gasoline demand,” Scott Lauermann of the American Petroleum Institute told Agricensus, pulling no punches in calling for repeal or significant reform of “this backward-looking mandate.”

A significant rebound in road fuel demand means the problem goes away to some extent, but Wednesday’s weekly EIA update showed a build in finished gasoline stocks and a fall in supply – the first in six weeks.

Optimism that US motorists were driving themselves out of the demand dead end that Covid-19 lockdowns had imposed waned, and future updates will be watched closely to see if the driving bounce has plateaued – with consumption levels still well below pre-Covid-19 demand.

Mandates

While the US operates to a maximum 10% ethanol blend in its gasoline mix – E10 – the mandates are volumetric, with the EPA’s decision influenced by inputs from the Department of Energy, where the EIA publishes a monthly Short-Term Energy Outlook (STEO).

“The May STEO normally drives the preliminary RFS rule for the following year, and the November STEO (covering October) is used to calculate the final rule,” Meyer said.

May’s STEO report reflected data collected through April and flagged the “heightened levels of uncertainty” surrounding Covid-19, but expects the greatest impact this quarter, with the effects “gradually dissipating over the next 18 months”.

While the current proposal looks set to accept a 15 billion gallon mandate, the next few months could be key in influencing the STEO’s outlook for 2021, and may provide further fuel for conventional oil to press for a reduction in the role of ethanol at the pumps.

Moreover, the ethanol industry is still smarting from the demand destruction that it argues has been heaped on the sector over the increased use of small refinery exemptions under Donald Trump’s administration.

The exemptions, known as waivers, allowed refiners to cite economic hardship to avoid blending mandates – a legitimate provision packed inside the RFS, but that had been hugely expanded under Trump’s EPA, before a court decision ruled that the increased use was wrong.

Biofuel sources have been pushing for an increased mandate to compensate for the demand lost to the waivers, but those hopes appear to have been snuffed out.

“EPA should use the proposal to restore the inappropriately waived volume of 500 million gallons of conventional renewable fuel, as ordered by the D.C. Circuit Court in 2017,” Jeff Cooper, president and CEO of lobby group the Renewable Fuels Association said in a statement.

However, the next few months will likely see battle lines drawn again as the US heads into its most divisive presidential election in memory.