This August, Bloomberg reported that U.S. corn production will be higher than expected, and is set to reach a record level thanks to improved yields. At the time, corn farmers must have been concerned about the potential oversupply, but they’ve just got some great news.
Earlier this week, the EPA finalized the Renewable Fuel Standard, which is part of the 2007 Energy Independence and Security Act. The new standard calls for 15 billion gallons of ethanol to be produced from corn in 2017. For reference, one bushel of corn produces around 2.8 gallons of ethanol. The 2016-2017 crops are estimated at 15.15 million bushels.
When the record production estimate was made public by the Department of Agriculture, its effect on corn price futures was identical to the effects of the global crude oil glut on Brent and WTI. The effect of the EPA’s latest announcement should, on the other hand, boost prices like an OPEC production cap would boost oil benchmarks.
Unlike Big Corn, however, the oil industry is clearly not happy with the news, even though the biofuel target for 2017 falls short of the original from 2007, which was 24 billion gallons of biofuels: ethanol and biodiesel. The revised 2017 mandate is for 19.28 billion gallons of biofuels, up 6 percent on 2016.
The initial target became impossible to achieve, the FT reminds us, because engines became more efficient and burned less fuel, therefore reducing the need for increasing amounts of biofuels to be blended with the gasoline or diesel to reduce harmful emissions. Related: What Trump Means For LNG
The oil price crash turned out to be a boon for biofuels, however, as it raised fuel demand. With crude prices about to stay below US$60 for a while, even with an OPEC agreement, this demand will likely continue to be strong.
Representatives of the renewable fuels industry are happy. “The move will send a positive signal to investors, rippling throughout our economy and environment,” said the president and CEO of the Renewable Fuels Association Bob Dinneen.
Oil producers and refiners are worried. Shares in Valero Energy, Tesoro Corp, and HollyFrontier all fell after the announcement. A VP for Tesoro said the new biofuel mandates are “unworkable” and the downstream director of the American Petroleum Institute called them “irresponsible.” Related: Which Oil Majors Are Best Positioned For The Future?
While it’s clear that no government could ever make everyone happy, the new mandates mark what could possibly be a major milestone in the development of the biofuel industry. Until recently, Big Oil slept safe in the knowledge that no one would dare break down the so-called blend wall: the ratio between biofuel and fossil fuel that is safe for the engine. At the moment, the wall is 10 percent or less for maximum effectiveness.
If the 2017 ethanol targets are to be achieved, the blend wall as it looks now might have to be breached. On the other hand, the EIA expects gasoline and distillate demand to grow, which could maintain the wall, which, according to a December 2015 article by Bloomberg, was already breached this year, with the EPA setting the 2016 ethanol target at 14.5 billion gallons out of a total 18.11 billion gallons of biofuels to be blended into gasoline and diesel. Cars and trucks, apparently, survived.
This latest blow to the oil industry could serve a practical purpose: it could deepen their awareness of the changing energy realities and the determination of more than enough stakeholders to advance their greener-economy agenda.
By Irina Slav for Oilprice.com
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