The obvious takeaway is that none of EPRINC's recommendations for replacing the lost ethanol volume that might occur under a "long-term waiver" of the RFS is economically practical or politically acceptable. Thus, the clear choice for policymakers would be to maintain the RFS as is.
- About EPRINC: EPRINC is a non-profit group funded by Big Oil, staffed by former oil company employees, and directed by a board of trustees that is a veritable who's-who of Big Oil executives—including AFPM's president and top lobbyist. EPRINC was formerly (and less ambiguously) known as the Petroleum Industry Research Foundation, or PIRINC. That disclosure helps explain some of the biases and preconceptions that immediately rise to the surface of the EPRINC paper.
- The paper is rife with internal inconsistencies. For example, the author bemoans that "The RFS' volumetric mandates have created inelastic demand for ethanol," but then acknowledges that ethanol production has plummeted since the beginning of the year "...as high corn prices have caused many ethanol producers to idle production." If the RFS truly created "inelastic demand for ethanol," ethanol and/or RIN prices would have adjusted sufficiently to keep ethanol producers from idling some production. Rather, RIN prices remain at historically normal levels, and ethanol prices remain at a ~$0.50/gallon discount to gasoline.
- The paper actually makes a strong case for protecting the RFS in the long term. While EPRINC agrees with numerous expert analyses that a one-year RFS waiver would have little or no effect on corn demand or prices, it suggests a "long-term waiver" (2-3 years) could cut ethanol demand in half. Notwithstanding the fact that EPA does not have the authority to grant more than a 1-year waiver, the paper suggests the lost ethanol volume under a multi-year suspension could be offset via several economically impractical and politically infeasible options:
- Extracting more gasoline and less distillate from each barrel of crude oil. This would, of course, drive heating oil and diesel fuel prices (already at record highs) substantially higher. Higher diesel fuel prices would increase the costs of consumer goods across the board, including food and clothing.
- Increasing the capacity utilization of European oil refineries and increasing gasoline imports from Europe. Obviously, increasing imports of finished gasoline from Europe defeats the entire purpose of the RFS, which is to reduce dependence on foreign oil sources. While it may sound harmless to ramp up gasoline imports from Europe, it is important to note that nearly 80% of the crude oil processed by European refineries comes from OPEC and Russia and is typically priced much higher than most of the crude oil processed by U.S. refiners. Thus, such a response to reduced ethanol consumption only makes America more dependent on foreign oil from OPEC and increases gas prices.
- Adding oil refining capacity in the U.S. Curiously, this recommendation is at odds with EPRINC's own contentions that current policy and regulations prevent the building or expansion of additional U.S. oil refining capacity.
The EPRINC study offers no new or legitimate criticism of the CARD studies and does nothing to refute the detailed responses of CARD to the recent criticisms from Knittel & Smith.
- The EPRINC paper simply re-hashes recent ill-founded criticisms (Knittel & Smith) of a series of studies by the Center for Agricultural and Rural Development (CARD) examining ethanol's impact on gas prices. The CARD authors prepared two detailed responses to Knittel & Smith, ultimately concluding:
- "...ethanol now provides approximately 10% of the fuel used in gasoline engines. In any other commodity market, a rapid increase in the production of a close substitute would be expected to cause a reduction in prices and profitability. Why do Knittel and Smith believe the gasoline market would act any differently?"
- "Consider the following scenario, removing any issue related to ethanol. Suppose that the US refining industry found a magical catalyst that allowed it to squeeze 7% to 10% more gasoline from each barrel of crude, without impacting the production of other distillates or requiring new capacity. Basic economics would say that gasoline prices would fall relative to the price of other distillates; and yet if Knittel and Smith are to be believed, there is no indication that this would occur."
- "Knittel and Smith present seven alternative versions of our model, all of which apparently show a lower impact of ethanol production on gasoline prices. Four of these models are based on the flawed assumption that one can use the change in refiner's margin and the change in gasoline prices interchangeably. The remaining three models all suffer from an obvious endogeneity problem, which when corrected produces results that are similar to ours. What is then left of their paper is a series of entirely unrelated regressions where they regress unrelated variables against each other without appropriate controls, and with predictable results. I believe that the magnitude of all our results are reasonable and that they can be used in the current policy debates surrounding ethanol. Our results show that the closure of ethanol plants may have a serious impact on gasoline prices."
- The analysis of crop and animal feed markets contained in the EPRINC paper is absurd and misleading. While EPRINC may have expertise in the analysis of oil refining and transportation fuels, it should leave the business of crop and animal feed analysis to those who understand those markets.
- EPRINC demonstrates a total lack of understanding with regard to the value of DDGS. In an attempt to support the false notion that DDGS offer no cost savings relative to corn, the paper includes a terribly misleading chart that shows corn and DDGS prices on separate axes and using separate units. The chart leaves the reader with the idea that corn and DDGS prices have, for the most part, been priced at parity since 2007. However, when properly compared using a $/ton metric for both commodities, it is clear that DDGS have been, on average, $28/ton cheaper than corn since the beginning of 2010 (see Figure 1). This means DDGS has been 85% the price of corn on average since 2010, with the ratio often dropping below 80%. Additionally, a number of nutritionists have found that DDGS has superior feeding value to corn, meaning the actual economic benefits of feeding DDGS extend beyond its 15% discount to corn. This greater feeding value is the reason USDA found that 1 ton of DDGS typically replaces 1.22 tons of corn and soybean meal in the animal feed market.
- EPRINC outrageously suggests a "multi-year waiver of both the ethanol and biodiesel mandates would free millions of acres of land for food and livestock uses..." This statement demonstrates an obvious lack of understanding of agricultural markets and the farmer/land owner's economic decision-making process.
- Farmers are rational economic actors and they make planting decisions based on prospective demand. If a multi-year waiver of the RFS did in fact substantially reduce ethanol output, and in turn corn demand, farmers would respond by planting less corn acres. Thus, it is highly unlikely that any more corn would be available for livestock feed than would be the case if the RFS was maintained. Indeed, if demand for cars is reduced, automobile manufacturers reduce their production and prices don't change; agricultural markets are no different. There is certainly no guarantee, either, that land not planted to corn would automatically be planted to other feed crops.
- EPRINC asserts that other corn users have been forced to ration demand while the ethanol industry has somehow been isolated from demand rationing. This is simply not true.
- Far from immovable, inelastic "grain vacuum" implied by EPRINC, the RFS program has important flexibilities that have allowed the ethanol industry to respond naturally to price signals and participate with other grains users in the demand rationing process. In fact, recent projections from the Food and Agriculture Policy Research Institute's (FAPRI) and USDA show corn use for ethanol falling more than corn use for feed in the 2012/13 marketing year. When compared to 2011/12 levels, FAPRI projects a 10.7 percent cut in the amount of corn used for ethanol and co-products, while corn use for feed is expected to fall 8.2 percent. Similarly, USDA projects reductions of 10 percent for ethanol and co-product use and 5.7 percent for feed use in 2012/13.