The Future of Ethanol Demand

Changes proposed to the Renewable Fuel Standard (RFS) and possible modifications to the ethanol Blend Wall bring to light concerns over the future of the ethanol industry. Decreases in gasoline consumption will bring with it decreases in ethanol demand unless the industry can find new avenues for growth. Even if ethanol can hold off Big Oil's lobbying attempts to change the RFS, they will need to compete with emerging advanced biofuels that may start to impede on the upside of Archer Daniels Midland Company (NYSE: ADM  ) , Green Plains Renewable Energy (NASDAQ: GPRE  ) , and other major ethanol producers.

Inevitable declines in domestic demand
Retaining the status quo 10% ethanol blend in gasoline in the United States would be enough to cause concern among the nation's major ethanol producers. Domestic gasoline consumption has been steadily declining since the original inception of the RFS. The trend should continue as standards established in 2011 to reduce greenhouse gas emissions and increase fuel efficiency for medium- and heavy-duty trucks take effect this year and are slated to last until 2018.

Shortly following the State of the Union address, President Obama stated a coalition of government agencies, manufacturers, and truckers was being assembled to "develop fuel economy standards for heavy-duty trucks that will take us well into the next decade." Gasoline consumption from this component of the transportation sector (which is currently responsible for 20% of on-road fuel consumption) will be declining well into the future, and declining gasoline consumption without increasing the established blending limits means that ethanol consumption will decline as well.

The only two viable options for increasing long-term demand for ethanol are to increase the blending limits, or to establish a stronger market for vehicles fueled by higher ethanol blends. Increasing the blending limits seems like a daunting challenge with Big Oil investing big money into lobbying for changes to the RFS as they seek to retain and possibly even grow their share of the diminishing transportation fuel market. Likewise, the idea of growing the market for high-ethanol fuel blends for transportation purposes is extremely ambitious as innovations and expanding infrastructure in electricity, hydrogen, and renewable diesel are filling the field of petroleum independent transportation.

Meeting global demand
Global growth in gasoline consumption is expected to outpace that in just North America and Europe over the next several decades, with China projected to lead the world in total energy demand for commercial transportation by 2040, and India projected to have the highest growth rate through 2040. Is it feasible for the American ethanol industry to capitalize on global demand?

As the United States continues to ramp up oil production while cutting consumption, exporting American fuel will become more accepted and accordingly will become much more common. Ethanol exports could potentially follow suit. Europe, for example, imports far more biofuels than they export, having imported about six times more ethanol in 2013 than they exported. Ethanol imports in Europe are expected to nearly double over the next decade, while exports will remain constant. What is less clear is if Europe will source their ethanol imports from the corn-based U.S. or sugarcane-based South American countries. Likewise, the possibility exists for the European and even the American public to take issue with corn-based ethanol sources and push for cellulosic feedstocks for ethanol or even seek other renewable blending fuels like butanol.

The takeaway
Whether sourced from corn or other cellulosic materials, the demand for ethanol will decrease domestically without a supportive RFS or an expanding market for higher blend fuels. More insight into both the short- and long-term future of the ethanol industry can be garnered later this year, when the EPA releases the finalized plans for the 2014 Renewable Fuel Standards.

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