The markets were abuzz last week with gossip about EPAs pending proposal for 2014 renewable volume obligations (RVOs) under the RFS. One rumor suggested EPA was mulling the idea of cutting the renewable fuel portion (often called the conventional biofuel segment) of the 2014 RFS from the statutory level of 14.4 billion gallons (BG) to 13.0 BG. Of course, such a cut would be a dream come true for the oil industry and it coincides almost perfectly with the wish list API and AFPM submitted to EPA in August in the guise of a waiver petition. We discussed why such a proposal to cut this portion of the RFS would be unlawful and violative of EPAs statutory authority here. But to underscore the importance of the RFS to the economy and environment, we wanted to examine the likely impacts of Big Oils dream scenario. Slashing the renewable fuel portion of the RFS from 14.4 BG to 13.0 BG could have the following impacts: 1. Corn Prices Sink and Farm Income Falls Cutting the requirement by 1.4 BG would reduce demand for corn by some 500 million bushels. Corn ending stocks would be pushed to nearly 2.4 billion bushels. This would be the highest level of stocks since 1987/88, when corn prices averaged $1.51/bushel. Corn prices are already at 37-month lows due to the production of a record crop in 2013. A large cut to the RFS would push prices even lower. According to an analysis last week by Deutsche Bank, such a dramatic cut in the conventional mandate (from 14.4 billion to 13) would be negative for corn. Going forward, we see 20-25% lower corn prices than if the original mandate were left unchanged and met. The report also noted that no reduction in the mandate is needed for 2014. If a cut of 1.4 BG was made to the RFS, corn prices could fall by $0.80-1.10/bushel to a six-year low and the total value of the corn crop could plunge by $13 billion. Without a corresponding reduction in input/production costs (which is incredibly unlikely), such a decrease in corn prices would negatively affect profitability for U.S. farmers and reverse the trend toward higher net farm income. A shock of this magnitude to agriculture markets would be particularly unwelcome given the unsettled and uncertain future of the Farm Bill. 2. Increased Demand for Gasoline and Higher Pump Prices Gasoline demand would increase to fill the 1.4 BG void in ethanol blending. The lost ethanol volume would likely be replaced with gasoline refined from a combination of imported oil and unconventional crude from tight oil (fracking) or tar sands. Approximately 22.5 million barrels of gasoline would be needed to replace the lost ethanol volume. More than 49 million barrels of crude oil would be needed to refine this amount of gasolinethats roughly equivalent to one years worth of oil imports from Libya, or two months worth of tight oil production from fracking in North Dakota. Increased demand for gasoline would obviously lead to higher gasoline prices. Marzoughi & Kennedy of Louisiana State University found that every billion gallons of increase in ethanol production decreases gasoline price as much as $0.06 cents. Adding ethanol to gasoline has the same impact on gasoline as a positive shock to gasoline supply. Thus, removing 1.4 BG of ethanol from the marketplace would cause gas prices to increase by more than $0.08 per gallon. Accordingly, U.S. consumers would spend some $10.6 billion more on gasoline in 2014. 3. Increased GHG emissions from Transportation Sector According to the latest GREET analysis published by Wang et al., average corn ethanol reduces greenhouse gas emissions by 34% compared to gasoline (including hypothetical land use change emissions). Thus, replacing 1.4 BG of ethanol with an energy-equivalent amount of gasoline would add 3.7 million metric tons of CO2-equivalent GHG to the atmosphere. Thats like adding 725,000 cars to the road overnight. 4. Puts American Jobs at Risk Based on recent economic analysis, the production of 1.4 BG of ethanol would support 7,400 direct jobs and 30,000 indirect and induced jobs. Thus, these jobs would be lost if the Big Oil dream scenario were to become a reality. 5. Discourages Investment in Biofuel Infrastructure Since the beginning of 2013, at least 195 retail gas stations have added E85 pumps. These investments were made because the 2013 RFS volumes sent a strong signal to the marketplacevia RIN valuesto add infrastructure capable of dispensing higher-level blends. As detailed in a recent series of reports by the Center for Agricultural and Rural Development, the RIN mechanism and RFS policy signals are encouraging the market to breach the blend wall through the increased use of E85. However, investments in higher-level ethanol blend infrastructure would likely evaporate under Big Oils dream scenario for 2014. Thats because RFS requirements could be met simply by blending E10 and maintaining the status quo. The transformation of the liquid fuels market that is currently under way would slow to a crawlor worse, it would come to a screeching halt. 6. Deters Investment in Advanced and Cellulosic Biofuels Potential investors in advanced and cellulosic biofuels are watching the 2014 RVO discussion very closely. If the Big Oil dream scenario came true, it would unquestionably send a strong signal to the investment community that the Administrations commitment to biofuels of all types is wavering. As described above, a significant reduction in the 2014 RVOs would slow or halt investments in the infrastructure needed to distribute and dispense larger volumes of ethanol. The future of the advanced and cellulosic ethanol sector depends in large part on the development of an infrastructure network capable of bringing higher-level ethanol blends to the consumer. The Bottom Line While it is important to remember that EPA has not formally proposed the 2014 RVOs and last weeks drama was driven by unverified rumors, it is clear that the impacts of reversing course on the RFS would have real and severe consequences. Sharply lower farm income, the largest corn surplus in 25 years, higher gas prices, fewer jobs in rural America, increased GHG emissions, and stifled investment in biofuels may sound like a dream come true to Big Oil. But for the agriculture sector, investment community and U.S. consumers it would be nothing short of a nightmare.