DOE Annual Energy Outlook. The AEO 2016 Early Release[1] is six months late, and the Energy Information Administration (DOE-EIA) says "This outlook is not a prediction of what will happen, but rather a modeled projection of what might happen given certain assumptions and methodologies."
But what "might happen," per the EIA, is that US motor gasoline consumption will decline by 15-20%, while at the same time crude oil price will rise again to the $100 per barrel range.
Does this make sense? How can you reduce US gasoline demand in a major way, increase US fracking when needed, and still have crude oil above $100/barrel?
The reason for the decline in motor gasoline consumption, EIA says, is "light-duty fuel economy"--or presumably strict adherence to the CAFE standards made "final" in 2012 for years 2017-2025.
- But these CAFE standards are subject to a "Technical Assessment Review" due from EPA next month, and subject to Auto Industry public comment. The industry will surely say (loudly) that the buying public, seeing cheap gasoline, wants more low-mpg SUVs, and that electric cars and other efficient alternatives are not yet ready.
- One option for meeting the new CAFE of 2017-2025 is high compression engines using mid-level high octane fuel blends, such as E25. The Ag-Auto-Ethanol Working Group, involving all the major auto-makers, seems to like this approach, but it would require EPA to regulate both the fuel and the engine at the same time--a departure for the agency.
Catch-22 for Commercial Ethanol Planners?
- We cannot adopt the AEO 2016 motor gasoline volume forecasts as advice for E10, because the 15-20% reduction might well be accomplished by the use of E25 in 50-70% of all light duty vehicles, raising overall ethanol demand by, say, 6 to 10 billion gallons by 2025-2030.
- We cannot adopt the AEO 2016 crude oil price rising above $100 per barrel without boosting the odds (with corn price in the $4/bu range) for very significant growth as well in ethanol exports!
So much for using official "what might happen" numbers for the PRX Blue Sky Model (2016-2025), we'll have to rely on our current "DIY" approach!
EPA Proposed Rule for RVOs in 2017. The EPA does NOT rely on the EIA AEO 2016 for its annual rule making, but rather the EIA Short Term Energy Outlook (STEO), as required by the text of the 2007 Energy Act. The April 2016 STEO is a monthly projection of all energy volume and price factors, extending through calendar 2017.
The full text of the May 18, 2017, EPA NPRM is 85 pages.[2] Based on the April 2016 STEO, the EPA puts calendar 2017 motor gasoline volume at 142.337 billion gallons and the E10 "blend wall" at 14.205 billion gallons--but proposes the RVO for Conventional Renewable fuel at 14.800 billion gallons. This proposed amount is down from the 15.000 billion gallons in the Energy Act of 2007, and the proposed Advanced Renewable Fuel is set at 4.000 billion gallons. Thus the EPA proposes Total Renewable Fuels at 18.800 billions gallons in calendar 2017, down from the statutory 24.000 billion gallons. --For the important details on these numbers, please see the PRX slide deck and podcast.
EPA makes the reductions according to its interpretation of the waiver of "inadequate domestic supply," now being challenged in court by various renewable fuel stakeholders.
EPA says, "We believe the standards we are proposing will drive growth in renewable fuels, particularly advanced biofuels, which achieve the lowest lifecycle GHG emissions. The proposed volume requirements recognize the ability of the market to respond to the standards we set while staying within the limits of feasibility."
But EPA never clarifies what it means by "ability of the market to respond to the standards." Does this include, for instance, the passing of RIN prices on to the public at the pump, so that higher costing Advanced Biofuels are paid for by the end users, as opposed to "the regulated parties" (the refiners), and thus also with the RIN price incentive being paid "by the market" to renewable fuel producers?
EPA in a list of ways to exceed the E10 blend wall does mention "Co-development of new technology vehicles and engines optimized for new fuels," the first time I have ever seen the mid-level blend idea acknowledged by the agency.
Note on PRX Strategic Roundtable of May 18. Busy days! Just before our meeting, the DOE issued its Annual Energy Outlook and then just as we assembled around the real roundtable at 9am on the 18th, rumors came that EPA would release its Proposed Rule for 2017 RVOs by mid-day--and so it did!
The morning discussions at the Roundtable were top-notch--we heard from climatologist Roy Spencer on the progress of La Nina, and we heard from USDA's senior China Economist Fred Gale on the WAOB's official number of 87 mmt of soybean imports for crop year 2016-17. The net-net on these two topics: (1) The correlation of La Nina (even combined with the NE Pacific ocean temperature) is just not good enough to permit a good guess at Jul-Aug weather in the cornbelt; and (2) the WAOB soybean number stands as is, it's the official USDA forecast, based on steady annual growth of imports--probably more for food oil than meal for pork, but experienced China hands do expect the record retail pork prices to bring more hog production and pork consumption back on line quite soon.
In a strange parallel, China with its giant bureaucracy, together with a commercial sector that always finds "work-arounds", is every bit as puzzling to Experts as is La Nina and US corn-soybean yields!
One participant at the Roundtable said, "Fred, I heard what you've said, but we really need to know how good the USDA forecast is!" But alas, as Fred re-confirmed, all we know is that the forecast is indeed official, based on a kind of straight-line extension of past behavior! (And we know too that lots of futures players have their eye on La Nina! But in truth, we won't know the Jul-Aug weather until Jul-Aug!!)
PRX Blue Sky Model #42 will be published in about one week, after we've digested all the above details! (One potentially important new "detail" is the emergence of corn seed coat "cellulosic" ethanol, which Roundtable participants said could be very important for the long term.)
