Thursday, July 31, 2008

Sounds pretty simple to me...

Lest anyone think ethanol mandates are bureaucratic paperwork hassles with significant economic deadweight this straightforward explanation of how they work from the EIA:
All obligated parties (refiners and importers of refined fuel products) must satisfy their "renewable volume obligation" (RVO) which is essentially their share (based on how much fuel they produce or import) of the total renewable fuel that must be used (this year 9.0 billion gallons). Volumes of blended renewable fuel are assigned RINs (renewable identification numbers). If a particular party cannot blend their share, they may buy these RINs from parties that have over complied on their RVO (though some alternatives exist such as carrying a RIN deficit for one year or using one's own excess RINs from the previous year). In any case, every year every obligated party is required to document its RINs and show that they have the same or more than their RVO to the EPA. If they don't, they can carry a deficit as mentioned earlier or they will be penalized by the EPA. [More, with a great translation by The Oil Drum]
It could be that the drop in corn prices will buy a reprieve for setting aside the mandates, but only up to a point.  And that point looks like next year, simply because we could have falling gasoline demand to mix it with at the 10% level.  I expect increasingly pitched rhetoric from ethanol proponents who are looking at that wall.
The immediate problem is not that there will be enough gasoline to absorb the ethanol in 2008, 2009, and probably 2010; in these years the questions are "Is there enough infrastructure to send the ethanol to (and blend with gasoline in) as-of-yet untapped regions, esp. the southeast?" or "Will mounting political pressure over food/grain costs force the EPA to lower the mandate?" (witness Texas's recent waiver application).

After 2011 EIA projects there will not be enough gasoline sold to absorb the ethanol as E10; then the big question becomes how does the U.S. absorb the excess; as E85? (currently the only legal option) or as E15/E20? (as of yet not fully tested). Can the EPA lower the mandate if the E85 infrastructure is inadequate or too costly and the E15/E20 option is not available? Yes, but again this probably would not happen until after the "blend wall" (i.e., saturated E10 market) has occurred. [Same source]
As foot-dragging construction of new plants perks up with corn back in the $5 range, the very real possibility of ethanol sloshing around unblended - forcing the price down - could become the core issue for the industry.

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