Lately, a couple of my friends have posted their reactions to the Carter & Miller op ed in the NY Times. (You can see my take on it here.) I think Marc agrees too readily, and Michael brings up a good point, but misses the big picture. The most salient, thoughtful analysis of the current ethanol vis-a-vis feed debate was done by my colleagues at the University of Illinois. Scott Irwin and Darrel Good really understand the ethanol market. I’ve had countless conversations about it with Scott. On Scott’s recommendation, I even read Petroleum Refining to understand the structure of the ethanol and gasoline markets. (Fascinating book by the way, I highly recommend it.) Scott and Darrel point out that ethanol production is driven by demand from the oil companies (and blenders) not by the Renewable Fuels Standard. So easing the RFS won’t have any effect. Check out Scott and Darrel blog post for the details; it boils down to octane requirements and the high octane of ethanol. That’s also why we see a smooth, steady increase in ethanol production long before the 2007 RFS (or the 2005 RFS). Ethanol production began picking up in the late 1990s, when oil companies discovered the toxicity of MTBE, their main oxygenate and switched to ethanol as a replacement. Check out the picture:
There certainly was dramatic expansion in 2007 and 2008, but the buildup had been coming for a decade before that.
I think the RFS was a bid by oil companies to get cheaper oxygenate. In other words, the RFS is a result of oil companies’ demand for ethanol, not a cause of ethanol demand. Consequently, relaxing the mandate probably won’t have much of an effect.