‘Zero Evidence’ of Demand Destruction? Really?

FROM THE OCTOBER ISSUE: 2020 RFS rule is an opportunity for EPA to alleviate damage done to the ethanol industry by granting small refinery exemptions.
By Geoff Cooper | September 19, 2019

It’s one thing when oil industry lobbyists claim the massive increase in small refinery exemptions (SREs) under the Renewable Fuel Standard hasn’t affected ethanol demand. But it’s another thing entirely when the U.S. EPA itself boldly asserts that there is “zero evidence” that SREs have had “any negative impact on domestic corn ethanol producers.” But that’s exactly what an EPA spokesman said shortly after the agency rubber-stamped another 31 exemption requests. Really?

The U.S. ethanol industry has indeed been negatively impacted by the dramatic surge in SREs. Domestic ethanol consumption in 2018 was far below the level forecast by the U.S. Energy Information Administration at the start of the year. Further, 2018 domestic ethanol consumption fell from 2017 levels—the first year-over-year decline in 20 years. Ethanol’s share of U.S. gasoline consumption (the “blend rate”) also fell in 2018 relative to 2017, likely the first-ever annual decline in the blend rate.

These impacts have continued into 2019. Domestic ethanol consumption is on pace to be 450 million gallons lower this year than initially expected by EIA, which now “assumes growth in higher-level ethanol blends is limited in the near-term by recent small refinery exemptions …” Moreover, ethanol prices are severely depressed, profit margins have turned negative, corn use by ethanol plants is falling, and the U.S. ethanol industry is curtailing production.

On the very same day EPA suggested there is “zero evidence” of demand destruction, two major ethanol producers announced they were idling production. This means the total number of plants that have temporarily or permanently shuttered production since EPA began to massively expand the SRE program now stands at 15. Each of those facilities directly employed 40 to 50 workers and supported hundreds more jobs throughout the economy.

In fact, in the week following EPA’s August announcement of 31 more SREs, ethanol prices plunged 18 cents per gallon (12 percent), corn prices fell 47 cents per bushel (11 percent), and renewable identification number (RIN) credit values dropped from the already-low level of 20 cents to just 12 cents (43 percent). All told, the August announcement alone could result in a staggering $10 billion transfer of wealth from the agriculture and biofuel sectors to the oil industry. The evidence of demand destruction could not be any clearer.

However, on top of all this is the testimony of those who suffered the losses directly and have had to tell their employees the bad news. No one is more qualified to provide perspective on the economic impacts of SREs than those who participate in these markets every day. And this testimony is so easy to find in news reports and financial filings. Here’s just a handful:

• “Abuse of the RFS has dampened demand for our product,” said Neil Koehler, RFA board chairman and Pacific Ethanol CEO.

• “Small refinery exemptions issued by the EPA have absolutely hurt this industry as domestic blending is lower than last year,” said Todd Becker, CEO of Green Plains Renewable Energy. “While the EPA says blending is not being impacted, they are dead wrong.”

• “With negative margins in the industry persisting, you’re starting to see smaller ethanol refineries shut down now,” said Ray Young of ADM. “The small refinery exemptions are out there. That’s a negative for the industry here.”

• “The federal government is sitting at a decision point about the small refinery exemptions,” said Eric McAfee, Aemetis CEO. “If we just enforced federal law, the supply/demand of ethanol will dramatically improve, resulting in a significant improvement in margins for the ethanol industry.”

• Mike Jerke, Southwest Iowa Renewable Energy CEO, said, “… we continue to see very tight margins. The industry has become dependent on continued export demand to offset the EPA-induced shift in demand due to small refinery waivers.”

The solution here is simple: Stop granting unwarranted exemptions to refiners that can’t prove “disproportionate economic hardship;” redistribute any exempted volumes to nonexempt parties; and follow the D.C. District Court’s order to restore the 500 million gallons illegally waived from the 2016 RFS requirements. EPA can and should do all of these things in the final 2020 RFS rule, due out in November.

Author: Geoff Cooper
President and CEO
Renewable Fuels Association