Energy Insider: Why the Timing is Ripe for Ethanol Policy Reform

June 6, 2013

Geoff Styles, June 6- This April, two separate bills were introduced in the US House of Representatives to reform, or repeal, the federal Renewable Fuel Standard (RFS) that mandates how much ethanol and other biofuels must be blended into gasoline.

To understand why reform or repeal makes sense now, we should recall the factors that led Congress to enact this standard six years ago and consider how many of the basic assumptions underlying its design have changed since then. That requires a review of US fuel consumption and import trends, commodity prices, and the impact of the RFS on food prices. After summarizing the other points I want to focus on the last one, based on an interview I conducted with Dr. Yaneer Bar-Yam, an expert on complex systems who has developed a model that explains the behavior of food prices since the introduction of the first, less ambitious RFS in 2005.

Origins of the RFS

In the fall of 2007, when Congress was debating the Energy Independence and Security Act that included the current, enhanced RFS, the US energy situation looked dire. For four years oil prices had been rising more or less steadily from their historical level in the low-to-mid $20s per barrel (bbl) to around $90, on their way to an all-time nominal high of $145/bbl the following summer. US crude oil production was in its 22nd consecutive year of decline, while our crude oil imports had climbed to 10 million bbl/day, twice domestic production that year.

Even more relevant to the thinking behind the RFS, US gasoline consumption stood at a record 142 billion gallons per year and had been growing at an average of 1.6% per year for the previous 10 years–another 2 billion gallons added to demand each year. In its annual long-term forecast for 2007, the Energy Information Administration (EIA) of the US Department of Energy had projected that gasoline demand would grow to 152 billion gal/yr in 2013 and 168 billion gal/yr by 2020. Meanwhile, US net imports of finished gasoline and blending components had reached a million barrels per day in 2006, equivalent to 15 billion gal/yr–equal to the corn ethanol target set by the 2007 RFS for gasoline blending in 2015. And by the way, US corn prices for the 2006-7 market year averaged $3.04 per bushel (bu). In this environment, policy makers regarded ethanol as a crucial supplement to dwindling hydrocarbon supplies, from a feedstock that was cheap and readily expandable.