Welcome to the US blendwall.
Only by expanding can the gasoline market now accommodate new amounts of federally mandated ethanol. Yet gasoline consumption has stagnated in the US. An expanding requirement for ethanol in gasoline thus has outgrown the market's capacity to use the required substance. This is the blendwall.
What happens now?
Congress should have considered the question when, in 2005, it reinstated centrally planned fuel selection and again, in 2007, when it complicated and enlarged the mandate for renewable fuels. It should have accounted for the possibility that its judgments about energy markets might be wrong. Alas, politicians seldom admit fallibility. And their judgments about energy markets are nearly always wrong.
What, to repeat, happens now?
Scant comfort
The answer, from the industry most responsible for meeting the Renewable Fuel Standard, provides scant comfort. It appears in comments filed jointly on Jan. 28 by the American Petroleum Institute and American Fuel and Petrochemical Manufacturers on the Environmental Protection Agency's proposed rulemaking for the 2014 RFS.
API and AFPM warn about combined effects of the blendwall's arrival and depletion of stored renewable identification numbers. Called RINs, these are tradable credits generated with production of biofuel, including not only ethanol but also diesel made from biomass. Refiners and fuel importers can buy RINs to meet RFS mandates and sell excess RINs generated when they produce renewable fuels beyond required volumes. Anticipating the blendwall, these so-called obligated parties have banked RINs. That supply will succumb as the mandate rises against practical limits on the gasoline market's ability to use more ethanol, by far the dominant biofuel and nearly all made from grain.
As RIN scarcity approaches, according to the API-AFPM comments, obligated parties will have to lower the number of the credits they need to demonstrate compliance with the RFS. They'll do so by some combination of decreasing fuel production and imports and by increasing exports of gasoline and diesel. "A decrease in transportation fuel supplied to the domestic economy over and above the current and projected decrease in demand for transportation fuels will likely result in higher fuel costs and will have effects throughout the US economy as manufacturers, distributors, and suppliers adjust to higher fuel costs," API and AFPM say.
NERA Economic Consulting has projected dire economic consequences of the blendwall in the absence of ways for obligated parties to comply with the RFS other than by cutting supply. NERA's estimate, according to API and AFPM: "a contraction of multiple sectors of the US economy that will ultimately result in a massive decrease in [gross domestic product], totaling $770 billion in 2015."
Lawmakers tried to boost the market for renewable fuels by providing incentives for the manufacture and purchase of flexible-fuel vehicles, which can use ethanol blended to gasoline at concentrations of 51-83 vol % (E85). For several reasons, however, most buyers of subsidized flex-fuel cars and trucks have spurned E85, sales of which are moribund. And an Environmental Protection Agency effort to postpone the blendwall by raising the ethanol blending limit in normal gasoline beyond 10 vol % stalled over concern about engine damage.
Rising prices
The US thus faces shrunken supplies and rising prices of vehicle fuel this year—and, if the NERA study is correct, economic strains shortly afterward—unless blendwall distortions abate. In its proposed RFS rule for 2014, the EPA acknowledged the problem and invoked waiver authority to lower requirements for advanced biofuel—essentially everything but grain ethanol—and total renewable fuel. That step, if it survives attacks by renewable-fuel lobbyists, would help. But it wouldn't be enough.
The blendwall isn't the only problem Congress imposed on the republic when it usurped markets and enacted the RFS. The mandate for ethanol made from cellulose is even more fanciful. On that subject, more will appear in this space next week.
