As you might expect, corn and ethanol interests howled loudly at these exemptions. One of the loudest voices was POET, the world’s largest ethanol producer. The company announced that it would be cutting production and jobs as a result of the exemptions. But their response confuses concepts like “bailout” and “demand” in a way that is analogous to the example in the opening paragraphs.
POET’s Response Epitomizes a Backward Mindset
I will quote and address excerpts from their press release:
Unfortunately, the oil industry is manipulating the EPA and is now using the RFS to destroy demand for biofuels, reducing the price of commodities and gutting rural economies in the process,” said POET Chairman and CEO, Jeff Broin.”
The RFS is a mechanism that creates artificial demand for biofuels. It is a federally-mandated transfer of wealth from refiners to the ethanol industry. Some have characterized it as socialism, where the government is deciding what’s best for everyone. At the least, there is no doubt that it is a policy with socialist elements (where the government is dictating production and use). This is why — as I keep advocating — the ethanol industry needs to independently grow their ethanol markets so they aren’t dependent on the RFS.
EPA’s mismanagement of SREs has created an artificial cap on domestic demand for ethanol and driven RIN values to near-zero, which weakens the incentive for retailers to offer higher blends. Oil is making billions of dollars, yet still using EPA to stop biofuels growth by handing out hardship waivers to some of the wealthiest companies in the world, in contradiction with President Trump’s public comments. So far, the EPA has cut biofuels demand by 4 billion gallons and reduced demand for corn by 1.4 billion bushels, causing severe damage in rural America.”
Allow me to deconstruct this utterly ludicrous paragraph. It’s hard for me to understand a line of thinking in which not forcing someone to use as much of your product creates an “artificial cap” on demand. Let me be clear. There is absolutely nothing preventing the ethanol industry from selling as much ethanol as they like — especially in the Midwest where they have all the political power. Again, it’s like me acting utterly helpless when the government lowers the amount of product my neighbor must buy from me. Most people would ask “Why should you be completely dependent on your neighbor for your success? Where is your entrepreneurial spirit?”
Further, they throw out the “wealth” argument. Most refiners are not “oil companies.” They have to buy the oil they process. If it economically benefits them to buy less oil and blend ethanol, that’s exactly what they will do. They are in the business of making money. They actually suffer when oil prices are rising, because it cuts into their refining margins.
Valero, for example, is one of the nation’s largest refiners. They produce about three times as much fuel as the entire ethanol industry. They even own some ethanol plants to meet their ethanol blending obligations. Last year, they reported $3.1 billion in net income. Yet they also reported over half a billion dollars in ethanol compliance costs, after reporting nearly a billion dollars in ethanol compliance costs the year before. Again, what do you call a system in which we transfer money from a company with perceived wealth to one that we perceive has less wealth? Could I justify getting 30% of my neighbor’s wealth because I argue that he is wealthier than I am?
Finally:
POET made strategic decisions to support President Trump’s goal of boosting the farm economy. However, these goals are contradicted by bailouts to oil companies. The result is pain for Midwest farmers and the reduction of hundreds of jobs and hundreds of millions of dollars of economic activity across Indiana.”
So, not forcing some refiners to blend as much ethanol is a “bailout” to the oil industry? What do we call the RFS then? Regardless of any benefits we might argue, isn’t the entire law a bailout to the ethanol industry? This comment is just too much. If my take of my neighbor’s wealth is reduced from 30% to 20%, it’s apparently a bailout to my neighbor.
Conclusions
President Trump has been stung by the criticism of his decision, and is trying to think of ways to pacify farmers and ethanol interest. Reportedly:
Administration officials suggested expanding environmental credits that encourage production of “flex-fuel” vehicles that can run on high-ethanol gasoline and requiring government agencies to use more of them — both steps that could increase the use of corn in fuels.”
These are exactly the kinds of steps I have been proposing in recent columns. But I maintain that this should be driven at the state level. Federal views on ethanol will shift, but Midwestern views are unlikely to ever change.
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