The ethanol blend wall situation is not likely to change in the short term. Recent reductions in gasoline demand as a result of high prices, the economic downturn, and greater efficiency standards have already reduced the pool of gasoline available to blend with ethanol; this pool could be again reduced if gasoline demand falls further. While the EPA has approved a number of producers to sell an E15 blend for vehicles manufactured after 2000 (model years 2001 and after), a number of issues are likely to limit its consumption in significant volumes in the near term. Representatives from the oil and automotive industries have cited issues with fuel specifications and voided automobile warranties, while parties from the retail side have been concerned with liability issues as well as potentially higher infrastructure costs as a result of offering E15. These issues, combined with unknown consumer acceptability and an already constrained ethanol distribution network, are likely to limit E15 consumption to low volumes concentrated around ethanol production facilities in 2012.
The increased mandates of the Renewable Fuel Standard further complicate the U.S. ethanol trade situation in 2012 and beyond. The RFS mandates that 15.2 billion gallons of renewable fuels be consumed in 2012, of which 13.2 billion gallons can be met by corn-derived ethanol, up from 12.6 billion gallons in 2011. In addition, the Advanced Biofuel mandate, for which imported sugarcane ethanol along with biomass-based biodiesel qualifies, increases from 1.35 billion gallons in 2011 to 2.0 billion gallons in 2012. Domestically produced biodiesel met the majority of the mandate in 2011 with biodiesel production reaching almost 1.0 billion gallons, for which biodiesel receives 1.5 credits per gallon introduced to the market, resulting in almost 1.5 billion gallons of RFS credits. Assuming the same record levels of biodiesel production as 2011 for 2012, the increase in the Advanced Biofuels mandate to 2 billion gallons leaves approximately 500 million gallons of renewable fuels that are to be met by either imported sugarcane ethanol or biodiesel.
The interaction between the different fuels and mandates in the RFS looks to be on track to creating an ethanol swap between the United States and Brazil in 2012. In this scenario, the United States sends Brazil volumes of corn ethanol in exchange for Brazilian sugarcane ethanol, which draws a higher price in the United States thanks to the RFS Advanced Biofuel mandate as well as the at least temporarily re-instated California Low Carbon Fuel Standard program. This dynamic results in a complex environment where RFS-regulated parties and ethanol producers not only have to produce enough corn ethanol to meet the overall Renewable Fuels mandate, but likely must also import significant volumes of sugarcane ethanol to meet the Advanced Biofuel mandate, all in the face of demand constraints by way of the ethanol blend wall.