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Bipartisanship and Biofuels

A volatile mix.

Sep 30, 2013, Vol. 19, No. 04 • By DAVE JUDAY
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The safety valves to protect other grain users have failed as well. Severe drought conditions—the worst in 50 years—that reduced the corn supply last year did not meet the technical criteria to trigger the waiver administered by the Environmental Protection Agency. So a short supply of corn resulted in red ink on the ledgers of livestock feeders, meat packers, and food companies. Indeed, the corn market conditions were so bad that ethanol production suffered as well, with production dropping about 5 percent from 2011 to 2012.

As for the compliance credit system, it is the proverbial “canary in the coal mine” which has provided
the strongest signal to date that the RFS is in trouble. The tradable corn-based ethanol credits—known as renewable identification numbers, or RINs—allow refiners and blenders to meet their annual biofuel mandate either by producing the blended fuels themselves or buying RINs from other refiners and blenders with a surplus. The price of these credits has spiked from less than $.01 per RIN to a high of more than $1.40—a function of the reduced national fuel demand juxtaposed with the ever-increasing annual ethanol mandates and exacerbated by last year’s short supply of corn. 

Taken together these dynamics have created a RIN market that is volatile and costly and is adding to the costs of America’s retail fuel supply. Moreover, the Environmental Protection Agency, which administers the system, is now trying to develop a verification system after discovering more than $9 million in counterfeit credits were sold in 2009-10 by one sham biodiesel company that produced no biodiesel yet sold the credits. More than 20 obligated parties were victimized by this fraud.

Finally, as for energy independence and security, it should be noted that since the RFS was passed, monthly oil production in the United States has increased by more than 38 percent. In May of this year (the most recent month for which statistics have been released), the United States produced more oil than Russia or any Persian Gulf country or member state of the Organization of Petroleum Exporting Countries (OPEC), including Saudi Arabia. That was the seventh month in a row that the United States led world production. When President Bush said we needed to “get off oil,” U.S. proven reserves were at 22.8 billion barrels; today they’re at 29 billion barrels, and potential reserves are vastly greater given the Bakken shale and Eagle Ford shale formations in North Dakota and Texas respectively, and the oil shale in the Green River Form-a-tion in Colorado, Utah, and Wyoming.

Indeed, House Energy and Commerce chairman Fred Upton was understating matters when he noted in a July hearing that “much has changed since the RFS was last revised in 2007, including the exciting new developments that have led to unexpected increases in domestic oil and natural gas production.” The committee commendably issued a series of four white papers over the spring and summer grappling with the changed policy environment and posing questions for discussion among stakeholders, noting however that “building consensus will not be an easy task.”

Unfortunately, the only consensus this self-described bipartisan effort has reached so far was stipulated at the outset: that the biofuel mandates will be reformed, not repealed. The entrenched special interests have not been as dynamic as the energy market and don’t want to see their favors and preferences wiped away. Nonetheless, repeal should not be off the table, even if reform is the ultimate goal. As one affected industry trade group—the National Turkey Federation, which bore the brunt of high feed prices under the RFS—has pointed out, “the RFS needs a fresh start in order to put in place a smarter policy.” The RFS has become a Gordian knot. Lawmakers need to take a sword to our nation’s biofuels policy.

Dave Juday is an agricultural commodity market analyst.

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