There has been a media blitz lately by the oil industry saying that ethanol demand has been unaffected by the Environmental Protection Agency's (EPA) rampant grants of Renewable Fuel Standard (RFS) exemptions to small refineries. Recently, even some in the agriculture community have bought into these claims. Don't be fooled. Under former EPA Administrator Scott Pruitt, 19 small refinery exemptions were granted retroactively for the 2016 compliance year, and 29 were doled out for 2017, compared to seven or eight in each of the three previous years. The EPA reinstated RFS credits known as renewable identification numbers (RINs) to these refiners, which they can use for compliance rather than blending physical biofuels. As shown in a new analysis by the RFA, these large-scale exemptions have impacted both components of ethanol demand: quantity and price. The impact on quantity is reflected in the ethanol "blend rate," the average inclusion level of ethanol in the nation's gasoline supply. The blend rate exceeded 10% in all but three months in 2017, and it hit a record 10.8% in January 2018. However, it slumped starting in February 2018, as exempted refiners were flush with reinstated RINs, and as rumors and press reports regarding the exemptions made their way into the market. The blend rate fell to 9.8% in February, ticked down to 9.7% in March and receded further 9.5% in April. Between February and June, the blend rate exceeded 10% in only one month.
Monthly Ethanol Blend Rate in Gasoline
Sources: Energy Information Administration (Data), Renewable Fuels Association (Analysis)Additionally, as alluded to above, small refinery exemptions have impacted ethanol prices along with ethanol consumption. The RFA conducted a basic regression analysis to determine the effect on prices. The results showed that ethanol prices were 8 cents/gallon lower than they otherwise would have been in February, and that the impact grew to 34 cents/gallon by June and stayed at that level throughout the summer. Every gallon produced and sold by the U.S. ethanol industry has been priced lower than would have been the case in the absence of the exemptions. There were 9.4 billion gallons of ethanol produced between February and August (the latest month for which comprehensive supply/demand data are available). By multiplying production by the price impact in each month, it can be determined that the industry's revenues were reduced by $2.3 billion during that time period. Moreover, the impact on the ethanol industry continues. Largely as a result of the exemptions, the EPA has estimated that RIN inventories at the end of 2018, which will be available to meet 2019 RFS obligations, will swell to 3.06 billion. This is an increase of 840 million RINs (nearly 40%) from the agency's estimate of inventories carried over into 2018. To the extent that refineries have "kept their powder dry" by using ethanol and other biofuels in recent months, they will be able to use their RIN inventories for compliance when expedient in the future. In summary, small refinery exemptions have had a marked effect on ethanol consumption and a massive impact on industry revenues. Don't be fooled by commentary and social-media posts that fail to show the full picture.