Adopting these incentives would cause ethanol usage to climb, and gasoline and diesel consumption to decline. But, what are the trade-offs? Most importantly, Iowa could control its own destiny when it comes to one of its most important industries. Other states have done this. California has its own fuel standards. It has its own carbon markets. There is no reason Iowa couldn’t do the same thing.
The downside for Iowa is that it would be less lucrative than the current arrangement. Presently, Iowa’s ethanol industry is supported across the entire country, but it’s a conditional support. The rest of the country doesn’t see the same benefits, and thus unless something changes there will continue to be annual fights over the RFS. And some day, the RFS may be abolished. But, if Iowa has seized its own destiny, that’s irrelevant.
Iowa is really just a case study for the top ethanol-producing state. But things get even more interesting if the entire Midwest used such a model.
Fuel Demand in the Midwest
The United States is divided into five Petroleum Administration for Defense Districts (PADDs). PADD 2 encompasses most of the Midwest. The states in PADD 2 are Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Wisconsin.
According to the EIA, PADD 2 presently consumes about 5 million barrels per day (BPD) of petroleum products. Two of those states — North Dakota and Oklahoma — are also major oil producers. Overall, PADD 2 produces about 2 million BPD of oil. But PADD 2 is also responsible for nearly all U.S. ethanol production (~1.o million BPD).
Given the 3 million BPD shortfall between PADD 2’s oil demand and its oil production, wouldn’t it make sense to fill a larger portion of this demand with locally-produced ethanol? The energy content of 3 million BPD of oil products is equal to nearly 5 million BPD of ethanol. If E85 were to step up and fill that void, it would require nearly five times the nation’s current ethanol production. That’s probably not possible, but there is more than enough potential demand there to make the RFS entirely irrelevant. The ethanol industry would forever race to catch up to demand, instead of perpetually fighting over the mandate.
Conclusions
This week, ethanol futures plunged to a five-year low. Ethanol inventories are rising. The consulting group IHS Markit recently said that China, which had looked like a growing export market for U.S. ethanol producers, is now expected to turn to countries like Brazil in light of the ongoing trade war.
Thus, the U.S. ethanol industry continues to suffer from problems outside of its control.
Ultimately, building up an E85 market across the Midwest could fix the ethanol industry. If the Midwest adopted E85 as its flagship fuel, there would be no blend wall to be concerned about, nor would an expensive ethanol pipeline be needed to export ethanol out of the region. The potential market across the Midwest is far beyond the nation’s current ethanol production, giving ethanol producers an ample opportunity to grow without constantly worrying about how they will be impacted by federal policies.
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