With the blend wall lowered, Congress needs to revise fuel standards

Officials at the US Environmental Protection Agency (EPA) are now poring over more than 15,000 officially submitted public comments about the level of ethanol and other biofuels to be used in the nation’s liquid fuel supply. Those comments are in reaction to EPA’s November 2013 proposal to reduce the overall required amount of ethanol sold to American motorists in 2014 -- a first since the United States has mandated the inclusion of ethanol in motor fuel in 2005.  The deadline for comments closed at the end of January and EPA must review them all before it makes a final decision on the 2014 ethanol mandate sometime this spring.

On the one hand, the proposed reduction was a simple and logical choice for the EPA. There is “stagnant or declining demand,” as EPA noted, for motor fuel. Total use of fuel is projected to be about 132 billion gallons in 2014, down about eight percent since its peak in 2007. EPA’s blueprint would reduce the biofuels volume for 2014 from a scheduled 18.15 billion gallons down to 15.21 billion gallons.  Most of the reduction, 1.7 billion gallons, would be in the category of “cellulosic ethanol,” a type of fuel EPA projects will only reach 17 million gallons of production anyway, or one-tenth of one percent of what was cancelled by EPA.

On the other hand, there is a complex legal and regulatory system implemented by Congress and the Bush Administration, known as the renewable fuel standard, promising a guarantee to U.S. ethanol makers of an outlet for their product -- regardless of demand or supply -- in increasing annual increments until at least 2022. EPA is put in the unenviable position of arbitrating between the statute and reality.  Thus, the controversy leading to the deluge of public comments.

That sums up the dynamics of U.S. biofuels policy, a classic example of national industrial policy: complex and legalistic trumping rational and reasonable. Indeed, whatever EPA’s final decision after the agency reviews all of the submitted comments -- which will take months --challenges are expected, likely bringing in the judicial branch into the process again. There have already been four court cases over one facet or another of the law since 2008.

As for the matter at hand, the amount of biofuels required for 2014, the renewable fuel standard has run up against opposing forces -- regulatory, demographic, and economic -- which undermine its practicality. From a regulatory standpoint, Congress increased the mileage standards for cars.

As part of the 2007 Energy Independence and Security Act which expanded the renewable fuel standard schedule, corporate average fuel economy fuel (CAFE) standards were also increased. Congress overlooked the contradiction of effectively increasing the fuel supply while mandating that cars use less fuel.  CAFE standards were raised for cars, light trucks, and SUVs to a combined average of at least 35 miles per gallon by 2020 -- a 10 mpg increase over 2007 levels. We’re now almost half way through that improvement and cars and trucks on the road today can run further on less fuel.

Demographically, there are fewer drivers, driving less miles. With Baby Boomers retiring there are fewer drivers commuting to work.  According to the US Census Bureau, the segment of the US population age 62 and older in 2000 comprised 14.7 percent, but by 2010 it was 16.2 percent and growing. Fewer commuters means less need for fuel.  Moreover, older drivers are not being replaced with an equal number of younger drivers who typically drive more miles. Again, the Census Bureau shows that the population aged 16 and younger -- potential new drivers -- is shrinking. The same trend that has statisticians alarmed about maintaining financial stability for Social Security is also resulting in shrinking fuel demand.

Economically, the housing boom of the late 1990’s and early 2000’s died. Much of that new home construction was in exurban developments. Thus the general trend of longer commutes ended with the housing boom.  This is the only factor of the three that could be subject to a reversal in the short or medium run.

All in all, total per capita vehicle miles driven by U.S. motorists are down about nine percent from their peak in 2005, and today per capita miles now are on a par with 1995 levels, except they’re driven virtually all in more fuel efficient vehicles.  EPA’s proposal to trim biofuel mandates simply recognizes the reality that there is only so much ethanol that can be forced into American fuel tanks.  Perhaps EPA’s latest action will be a cue for Congress to realize the flaws in the renewable fuel standard and take some much needed corrective action of its own.

Dave Juday is an agricultural commodity market analyst and principal of the Juday Group.

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Published: April 17, 2014 - Volume 13 - Issue 01