The ethanol industry is organizing a Day of Action on January 23 to raise support for retaining the established Renewable Fuel Standard (RFS). The call for action is in response to the Environmental Protection Agency (EPA) proposal to cut the amount of ethanol in the U.S. fuel supply by 3 billion gallons. The nation's largest ethanol producers including Archer Daniels Midland Company (NYSE:ADM), Poet, and Green Plains Renewable Energy (NASDAQ:GPRE) are essentially in a battle with the nation's largest oil producers, who are collectively being represented in the clash by the American Petroleum Institute (API).
The impact on ethanol
The RFS program calls for annual increases in the amount of renewable fuels to be blended into transportation fuels. The overall goal of the program is to reduce greenhouse gas emissions by replacing petroleum-based fuels with renewable fuels. The newest RFS proposal, however, calls for what amounts to nearly an 18% decrease in the amount of ethanol to be used for domestic fuel supplies.
Though there are intense ethanol skeptics who cite that corn production resources (fertilizer inputs, fuels used during planting and harvesting, etc.) make ethanol not-so-green, the API is cautious to not bring greenhouse gas emissions into the discussion regarding the merits of the RFS. The basic chemistry involved in gasoline combustion versus ethanol combustion processes is able to clearly show a decrease in overall greenhouse gas emissions through the use of ethanol.
Interestingly, the proposed call for decreases in ethanol production coincides with a time of low corn futures and higher margins for ethanol production that have enabled potential for a record production amounts. If the legislation was strictly a response to control greenhouse gas emissions, as it was originally written to be, then there would be little question disputing the validity of the RFS, and ethanol producers would be in position for record earnings.
Unfortunately for the ethanol industry, the more political side of things seems to be interfering with reality.
Support for modifying the RFS
The petroleum industry is, not surprisingly, the group most in favor of reducing overall ethanol production for use as a fuel. The situation now changes to determine what will be done to appease Big Oil while addressing the still very relevant issues of greenhouse gas emissions. The arguments made by the API are that increasing the amount of renewable fuels blended into petroleum-based fuels creates both compatibility as well as negative economic issues.
The engine performance and longevity issue is one that has been brought up time and again by ethanol opponents to counter the environmental arguments of the pro-ethanol crowd. Expanding the market for an E15 fuel blend (a blend of gasoline with 15% ethanol by volume) is a viable way to work within the originally intended confines of the RFS, but is a contentious issue.
Though E15 has been approved as a fuel for safe use in all vehicles produced after 2001, the API disagrees. In spite of extensive, government-funded testing that confirms E15 use without resulting engine issues, the API still argues that "the EPA rushed through approval of an up to 15% ethanol blend (E15) without adequate testing, leading to compatibility problems with E15, poor consumer acceptance and significant infrastructure and cost challenges."
Most recently, the argument regarding small-engine compatibility was used by Wisconsin governor Scott Walker to explain why, unlike the rest of the governors in the corn-growing Midwest, he would not support the ethanol industry in their efforts to be heard in the RFS debate.
The other most widely debated consideration in the argument against ethanol is the fact that it is predominantly produced from corn. Economic evaluations, impacts on food and gas prices, and environmental implications have all been exhaustively reviewed and argued by both sides, with the end result most often being that the two sides agree to disagree. Technologies converting cellulosic feedstock into ethanol are under continual development, and plants capable of producing commercial-scale amounts of cellulosic ethanol are planned goals for the upcoming year for Poet and other ethanol producers.
Past EPA projections on cellulosic ethanol production have not been realized, but it is appropriate to keep cellulosic ethanol as part of the discussion when considering the future of blending requirements and the broader environmental impacts.
Archer Daniels Midland Company is a giant corporation capable of holding its own in the world of renewable fuels, but going up against Big Oil is a different story. The expanded Renewable Fuel Standard implemented just over five years ago has enabled stable growth for Archer Daniels Midland Company along with other ethanol producers across the country. The future growth of corn-based ethanol producers will be greatly affected by a proposed decrease in ethanol production for fuel use, and toiling deeper into the world of politics is the only thing that can prevent the proposed decrease.
Fool contributor Shamus Funk has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.