It’s likely that some agricultural interests, and specifically ethanol producers, are going to either oppose or at least raise serious questions about the nomination of Attorney General Scott Pruitt for Administrator of EPA. Such opposition rests on the likelihood that the AG is probably not fully supportive of the Renewable Fuel Standard (RFS). Keep in mind that it remains difficult to find anyone outside the corn lobby who supports the program. However, given EPA’s extensive and costly portfolio of regulatory programs faced by the farm community, it might be wise for the agricultural community to take a somewhat broader view on his nomination. True, EPA may be inclined to modify its implementation of the RFS under AG Pruitt, we just don’t know yet, but it may also be willing to undertake major regulatory reforms on environmental regulations throughout the agricultural sector.
What we do know is that mandating ethanol volumes above 10% of the gasoline pool yields high costs and little additional ethanol use. The reason for this is that once you approach a blend of 10% ethanol into gasoline, customers remain highly resistant to purchasing fuels with additional volumes. A combination of rising costs and technical constraints take place.
We also encourage our readers to review the work of Professors Harry de Gorter and Dušan Drabik. Their research clarifies the relationship between the blend wall, RIN prices and ethanol prices. Professor de Gorter’s and Drabik’s research shows that high RIN prices flow from the requirement to meet the mandated volumes by over-blending of biodiesel and expanding sales of E85. What happens is that so-called “obligated parties,” those companies designated by EPA to fulfill the mandate requirements of the RFS, recover their costs through higher gasoline prices. Compared to a cost structure at blend levels below 10% (the blend wall), the costs of overcoming the blend wall mean everybody is worse-off with ever increasing mandated volumes of ethanol.