In mid-April, we took an initial look at the impacts on the ethanol market of the secretive small refiner exemptions from 2017 RFS compliance that EPA was said to be handing out “like trick or treat candy.” At that time, data from the Energy Information Administration (EIA) showed the exemptions touched off a trend toward lower RIN prices and weaker domestic ethanol demand, even though ethanol’s substantial discount to gasoline should have been driving maximum inclusion. Six weeks later, U.S. ethanol demand is even softer, RIN prices have fallen even further, and EPA Administrator Scott Pruitt’s “Demand Destruction” campaign continues to roll on through the Heartland. In essence, the recent tidal wave of small refiner exemptions has resulted in a flood of cheap RINs. And as a result, many U.S. refiners and blenders are reducing their use of ethanol. Refiners who received an exemption in 2016 and/or 2017 are likely confident they’ll score another bail-out from 2018 compliance obligations. Or at worst, if they don’t get another exemption, they know they can meet their 2018 RFS obligation with the glut of dirt-cheap RINs that were recently dumped on the market (not to mention vintage 2018 RINs that were apparently created out of thin air by EPA as yet another giveaway to Sinclair and HollyFrontier). Thus, the pressure is off, and refiners and blenders are no longer being compelled to make the investments that would have expanded ethanol blending well beyond the E10 “blend wall.” So, here we are, 21 weeks into the 2018 calendar year. So far, gasoline demand in 2018 is on a record pace and up a healthy 2 percent compared to the same period a year ago. Weekly gasoline demand has been above year-ago levels in 14 of the 21 weeks so far in 2018. Based on that fact alone, one would expect to see a commensurate increase in domestic ethanol blending, right? Not exactly. Thanks to the effect of the small refiner waivers, the actual volumes of ethanol blended in 2018 have been below year-ago levels in 14 of the 21 weeks so far this year—including nine of the last 10 weeks.
And the weekly ethanol blend rate (a more appropriate measure of U.S. ethanol demand that considers the fluctuations in gasoline supplied to the market) has been below year-ago levels in 17 of the 21 weeks in 2018. By this time last year, the weekly ethanol blend rate had topped 10.0% nine times. But this year, the 10.0% level has been crested just twice (and in one of those weeks it was just barely over, at 10.03%).
Lobbyists representing small refiners have suggested there is “too much noise and uncertainty” in the weekly EIA data to draw definitive conclusions from it (even though they point to the weekly data when they think it supports their arguments). Fine. Let’s look at the EIA monthly data that the small refiner lobbyists say is more reliable, even though there is a significant lag with the monthly data and the most recent available is for March. The monthly data show that average daily ethanol blending in February 2018 (i.e., when the bottom began dropping out of the RIN market) was 5% below the February 2017 average volume and 8% below the February 2016 average. While March 2018 ethanol blending was a hair higher than March 2017, it was below the March 2016 volume. Based on the trends indicated by recent weekly EIA data, we expect the monthly data for April and May will reveal even greater demand destruction when it is finally released.
On a final note, comparing current ethanol production levels and D6 RIN generation to year-ago levels (as refiner lobbyists like to do) masks the domestic demand destruction that is really occurring. Yes, both year-to-date ethanol output and D6 RIN generation are up a smidgeon from the same period a year ago, but neither should be viewed as a proxy for domestic demand. Production and consumption are two distinctly different things (didn’t the oil lobbyists learn anything about supply and demand from the Americans for Clean Energy vs. EPA case?). The reason ethanol production and D6 RIN generation are up slightly is because year-to-date ethanol exports are up substantially (RINs are generated for much of the ethanol that is exported, but those RINs are retired and unavailable for RFS compliance). Indeed, if not for the fact that robust growth in the export market has offset some of the lost demand resulting from EPA’s small refiner waiver jamboree, razor-thin profit margins in the ethanol industry would undoubtedly be deeply in the red and plants would be shutting down. In response to the ethanol demand destruction that continues to mount because of Administrator Pruitt’s actions on the RFS, the Renewable Fuels Association, along with the National Corn Growers Association, American Coalition for Ethanol, and National Farmers Union filed suit against EPA Tuesday on the Agency’s blatant abuse of the small refinery exemption provisions. It is our hope that the courts can put a stop to EPA’s war on the RFS before it’s too late.