Falling Gas Prices Pose Little Risk to U.S. Ethanol Demand

Sharply lower gasoline prices through November and higher ethanol quotes have raised concerns about the future of ethanol demand and the potential for lower corn prices, but University of Illinois ag economists Darrel Good and Scott Irwin say “this risk is overstated,” reported AgWeb.com.

In their study published Dec. 4, Good and Irwin said ethanol’s blend wall is likely close to 13.5 billion gallons, regardless of price relationships, so they do not see corn demand for ethanol falling below 4.9 billion bushels.

However, ethanol production is essentially stuck at that level, because the blend wall effectively acts as a cap on production. “There is very limited scope for expanding ethanol use through higher blends, at least through 2015,” the economists say.

A lock on 13.5 billion gallons in production is based on their view that the Environmental Protection Agency (EPA) in its final rule will keep the ethanol mandate near or at statutory levels of 14.4 billion gallons for 2014 and 15 billion from 2015 through 2022. Good and Irwin base their view on public comments from ethanol and petroleum industry participants, as well as the recent uptick in Renewable Identification Number (RIN) prices.

The mandate can be met with a combination of physical blending of ethanol and the retirement of the existing stock of RINs. They do not look for RIN holders to retire much because of risk that mandates could exceed the 10% blend wall. Therefore, the economists predict the Renewable Fuels Standard, for the time being, will be met through a combination of physical blending of ethanol and biomass-based biodiesel.

“Despite the favorable economics of biodiesel blending at the present time, the investment that the petroleum industry has made in formulating gasoline to be blended with ethanol at 10% means it is most likely that ethanol would be used to meet the renewable fuels mandate,” Good and Irwin say. S