Boosting RFS Targets Wouldn’t Raise Gas Prices

Sep 26, 2014

By Amanda Peterka

Increasing the ethanol mandate beyond the volume proposed by the Obama administration would not significantly affect the price of gasoline sold in the United States, according to a new study from Iowa State University.

The study found that increasing the corn ethanol mandate to 13.67 billion gallons from the 13.01 billion target that U.S. EPA proposed for this year would have no effect on gas prices. That’s because increasing the mandate to that level would not result in higher prices for the ethanol credits that refiners use to show compliance with the mandate.

Increasing the RFS from that point to 14 billion gallons would increase the total price of gasoline by a cent per gallon, the study found.

“Many in the oil industry have used the specter of higher pump prices to argue against increased mandates,” Iowa State economists Sébastien Pouliot and Bruce Babcock found. “These findings show that concern about the consumer price of fuel do not justify a reduction in feasible ethanol mandates.”

The study examines the dynamics of both E10, or gasoline containing 10 percent ethanol, and E85, or gasoline containing up to 85 percent ethanol, in various market situations. About 95 percent of the gasoline sold at gas stations around the country is E10, while E85 is sold in limited quantities for use in flex-fuel vehicles.

It comes as the White House Office of Management and Budget is wrapping up a review of the final EPA rule setting the 2014 renewable fuel mandates. EPA proposed slashing the mandate for ethanol on the basis of the blend wall, or the 10 percent ethanol saturation limit in the market. According to industry observers, EPA is considering increasing the target to 13.6 billion gallons based on increased gasoline demand and higher predictions of E85 use compared to when it first released the proposal last November.

According to the new Iowa State study, at the market-clearing ethanol volume of 13.67 billion gallons, the price of E10 would be $3.55 per gallon, while the price of E85 would be $3.12 a gallon. Increasing the mandate above that point would only slightly increase the price of E10 but would lead to a dramatic drop in the price of E85, the study found.

The finding that E10 prices won’t be affected much by an expanded ethanol mandate contrasts with the results of a recent Congressional Budget Office study that predicted E10 prices would increase by between 4 and 9 percent if the mandate increases. That study, however, assumed biofuel targets would increase as scheduled in the 2007 statute that created the renewable fuel standard, rather than be lowered by EPA (Greenwire, June 27).

The Iowa State study also identified 14.18 billion gallons as the physical limit to the amount of ethanol that can be used in the market today. The number is higher than the blend wall limit that critics of the ethanol industry have identified but below the level that Congress thought the industry would reach in 2014 when it passed the renewable fuel standard into law.

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