Ethanol Industry Perspective on The Renewable Fuel Standard

NCSL 2013 Legislative Summit Aug. 14, 2013

Geoff Cooper Renewable Fuels Association

• Trade association representing U.S. ethanol producers

• Mission is to “Drive expanded production and use of American-made renewable fuels and bio-products worldwide”

• Founded in 1981

• Offices in Washington D.C., St. Louis (MO), and Omaha (NE)

• Member producers include large agribusinesses as well as small farmer-owned co-ops

• Associate members include vendors, suppliers, supporters, etc.

About the Renewable Fuels Association (RFA)

Back to the Beginning: Why do we have the RFS in the first place?

• Diversify transportation fuel portfolio

– Reduce fossil fuel use (particularly imports)

– Reduce pressure on fuel prices

• Stimulate economic development and enhance farm income

• Reduce GHG emissions (& other pollutants)

Are these policy objectives any less important today than they were in 2007 or 2005?

RFS2: A 15-Year Energy Plan

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Year 6 of a 15 year

2013: Year 6 of a 15-year

plan

Source: EPA

Note: 2010-2013 RFS requirements based on actual RVOs; 2014-2022 based on statutory volumes

How Are We Doing So Far? Policy Goal Response

Diversify fuels portfolio • Ethanol now accounts for 10% of U.S. gasoline pool • E15 now a legal fuel blend; E85 sales on the rise

Reduce fossil fuel imports • Petroleum import reliance: 41% in 2012 vs. 60% in 2005 • U.S. now a net exporter of finished gasoline

Economic development • $43 billion in GDP from ethanol industry • 380,000 jobs across all sectors

Farm Income • Record income for agriculture sector in 2012 • Farm program payments significantly reduced

GHG and other emissions • CO2 emissions from gasoline/diesel lowest since 2002 • Emissions falling faster than VMT • CO and other criteria pollutants significantly reduced

RFS can’t claim all the credit for these developments, but it has absolutely played a significant role…

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Actual U.S. Ethanol Production Compared to RFS1 and RFS2 Requirements

Actual Production RFS2 (EISA07) "Conventional" RFS (EPAct05)

Ethanol Production has Responded to RFS Policy Signals

Production has always Production has always exceeded RFS targets, meaning excess RINs have been generated

2012 drought 2012 drought curtailed

production

What’s a RIN Credit? • A RIN (Renewable Identification Number) is a serial-numbered credit

that is generated when a gallon of ethanol is produced • Oil companies get one RIN (for free) with each gallon of ethanol they

purchase – Today, a gallon of ethanol (w/RIN attached) costs $0.75 less than a gallon

of gasoline

• Oil companies turn in RINs to EPA at the end of the year to demonstrate they blended required amounts of renewable fuels

• RIN credits are tradable – Example: Refiner A fails to blend the required amount of ethanol, and

Refiner B blends more than required. Refiner A can buy excess RINs from Refiner B to cover balance of obligation

• RINs have a two-year compliance life • RINs have no meaningful impact on retail gas prices

– Informa Economics study: Impact of RINs is 4/10th of 1 cent/gallon at most – RIN market is “zero sum”: refiners, blenders, marketers buying and selling

RINs to and from each other

2013 is a Critical Year

• Gasoline demand flat as RFS2 volumes increase

• 2013 RFS2 requirements exceed E10 saturation, necessitating the use of higher-level ethanol blends such as E15 and E85

• For first time since RFS was enacted, 2013 requirements compel a fundamental change in the behavior of obligated parties

RFS2 and the so-called “Blend Wall”

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Renewable Fuel Advanced Biofuel Cellulosic Biofuel Biomass-based Diesel

Source: EPA

Note: 2010-2013 RFS requirements based on actual RVOs; 2014-2022 based on statutory volumes

E10 “Blend Wall”

The “Blend Wall” CAN Be Torn Down

• There ARE safe, legal and economical options… – E85/“flex fuel” (E51-E83)in Flex Fuel Vehicles (FFVs)

– Mid-Level Blends (e.g. E16-E50) in FFVs

– E15 in MY2001 and newer vehicles (85% of VMT)

• But there are challenges that must be overcome… – E85 and MLBs must be priced competitively/

appropriately

– Lack of explicit E15 warranty coverage from autos for pre-MY2012 is a perceived issue

– Disparate RVP treatment for E15 (restricts summer use)

– Some state regulations must be changed to allow E15

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Minnesota E85 Sales

• FFV numbers are large and growing (currently enough FFVs to use 8-9 bg of E85)

• RIN prices enabling attractive E85/MLB pricing at ~3,100 stations nationwide

• E15 has sold well for the ~25 retailers who have offered it since summer 2012

• GM/Ford explicitly approve E15 in most MY12-13 vehicles. Add Volkswagen in MY14.

• Supreme Court will not hear Oil/Auto/Food appeal on E15 waiver case

The “Blend Wall” CAN be Torn Down

Major retail chain initiates E85 pricing

Minnesota locations

Major retail chain initiates E85 pricing program at its ~60

Minnesota locations

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Prices for Ethanol, RBOB Gasoline, and RINs Ethanol w/RIN RBOB Gasoline RIN Credit Ethanol - RIN

A refiner or blender can buy A refiner or blender can buy a gallon of ethanol with a

RIN for $2.20

The refiner or blender can The refiner or blender can separate the RIN and sell it

for $0.80

Thus, the net cost of ethanol Thus, the net cost of ethanol to the refiner/blender is

$1.40 per gallon

A gallon of RBOB gasoline A gallon of RBOB gasoline costs $3.00

The low net cost of ethanol The low net cost of ethanol translates to lower prices

for E85 at the pump

RINs drive lower prices & increased demand for high ethanol blends like E85

BP is “…quite well positioned in the short term. We're net long RINs. We've been able to trade into this spike recently and done quite well out of it. I'm very pleased about that.”

“…we are pretty well balanced. We do generate the majority of our credits by blending our biofuels directly.” RINs are “…not real significant.”

“Our retail and terminal networks generate more renewable credits than we require to meet our supply needs. We're generating around $20-million/month of excess RINs.”

The increase in Murphy’s refining/marketing income was “…primarily due to better results for ethanol production operations and higher sales prices for ethanol renewable identification numbers (RINs) in the current period.”

Casey’s most recent quarterly margins “…benefited from the sale of 10.3-million RINs for $4.8-million in the period.” (47 cents apiece)

Oil industry quarterly earnings statements about RINs

Oil industry claim: “The RFS is inflexible and rigid”

• Congress gave EPA tremendous administrative flexibility to manage the program

• EPA can waive part or all of the RFS if a petitioner demonstrates the program is causing economic harm

• EPA can adjust some RFS volume requirements annually if the fuels aren’t available

• EPA has already signaled that it will likely adjust some 2014 requirements: “EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements, including to both the advanced biofuel and total renewable fuel categories.”

Oil industry claim: “EPA requires us to blend fuels that don’t exist”

• Congress gave EPA authority to waive cellulosic biofuels requirements in the event the fuels aren’t available in the marketplace

• EPA has waived the requirements every year

• EPA has enforced just 0.5% of the statutory cellulosic biofuel requirement since RFS2 began (99.5% has been effectively waived)

Oil industry claim: “E15 could damage your car according to our study”

• Oil-funded study results are at odds with results from DOE/EPA study program and other research

• E15 has been sold for over a year:

~25 stations in 6 states ~1.7-2 million gallons sold Usually offered at 3-5 cent/gal. discount

to E10, despite higher octane (89) Roughly 40 million miles driven on E15 ZERO cases of misfueling in small engines

or boats ZERO claims of engine damage, failure,

problems, etc. ZERO claims of inferior vehicle

performance

Oil industry claim: “Fracking has eliminated the need for the RFS”

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Yes, U.S. crude oil production has increased in recent years…

Oil industry claim: “Fracking has eliminated the need for the RFS”

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U.S. Crude Oil Imports vs. Production U.S. Crude Oil Imports U.S. Crude Oil Production

…but we still import 50% of our crude oil! U.S. spending on U.S. spending on crude oil imports: $1 billion per day

U.S. crude oil imports U.S. crude oil imports from Saudi Arabia hit 5-

year high in 2012

Oil industry claim: “Government should stay out of energy markets”

• There is no such thing as a “free market” in energy

• Yale/DBL Investors study: Oil & gas subsidies totaled nearly $450 billion from 1918-2009

• Some tax incentive programs (e.g., percentage depletion allowance) used by O&G industry have been in place since 1913

• Oil industry urged Congress to maintain subsidies in July 16 testimony: “Without current law regarding intangible drilling costs (IDCs) and percentage depletion, producers would not be able to generate the capital necessary for the continued growth in domestic drilling and production activity.” Big Oil believes there is a “…need to maintain support of the oil and gas industry…”

Ethanol tax incentive expired

Ethanol tax incentive expired

in 2011

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U.S. Food Price Inflation and Ethanol Production

Ethanol Production (Right) Annual Food Inflation Rate (Left)

YoY Food Inflation Trend (1980-2012)

Oil industry claim: “The RFS increases food prices”

• U.S. ethanol uses less than 3% of world grain supply

• More grain available for food/feed than at any time in history

• World Bank: “…most of the food price increases are accounted for by crude oil prices (more than 50 percent)…”

• “Crude oil prices mattered most during the recent boom period because they experienced the largest increase.”

Avg. since 2005 = 2.8% Avg. since 2005 = 2.8% Avg. 1985-2004 = 3.1%

The Next Nine Years

• December 2012 article* in Biofuels: – “Global economic effects of the RFS2 policy are positive…”

– RFS2 increases U.S. GDP by 0.8% (~$120 B) in 2022

– “…fossil energy prices, particularly oil, declined as biofuels replace increasing portions of liquid fuel use in the USA.”

– Commodity prices increase less than 1% under RFS2

– Slight increase (0.4%) in U.S. agricultural land use is more than offset by agricultural land use declines in ROW

– “The transition to advanced biofuels is crucial to sustain the momentum in developing biofuels as alternatives to fossil-based liquid fuels.”

*Oladosu et al. (2012). “Global economic effects of US biofuels policy and the potential contribution from advanced biofuels.” Biofuels, 3(6):703-723.

Thank You

Geoff Cooper Vice President, Research & Analysis

Renewable Fuels Association 16024 Manchester Road, Suite 223

Ellisville, MO 63011 O: 636.594.2284 C: 636.399.4928