In contrast, Kauffman writes, hitting the ethanol "blend wall" – a virtual restriction on the volume of ethanol the market will take due to blending limits – is approaching quickly.
"Historically, this blend wall has been above the mandate, allowing the industry to satisfy rising mandates by increasing production. Under current policy, however, the ethanol industry may face the challenge to satisfy future mandates as they rise above the blend wall," Kauffman notes.
Right now, ethanol can contribute approximately 10% of a gallon of gasoline, what most consumers understand as the E10 blend. This composition creates the blend wall.
Another factor to consider, Kauffman points out, is this summer's EPA approval of E15 for the commercial marketplace. Though it may have an effect on increased ethanol use, many hypothesize that it will be slow to catch on due to high costs of installing blender pumps and the perceived anxiety expressed by automakers and consumers.
RINs play a part, too
Kauffman insists the market is still the driving force behind production, noting that any gap between the blend wall and mandated production could be filled using RINs, or credits that account for each gallon of ethanol produced. The RINS may either be used to fulfill current-year mandates or saved for another year, allowing up to 20% of the current-year mandate to be satisfied with RINs.
Kauffman says these RINs may dwindle in the future, signaling need for increased ethanol production and fueling the market.
"In the future, RIN prices could climb if the mandate rises above the blend wall and stored RINs are needed to fulfill RFS mandates. RIN prices could also jump if corn prices rise further or if crude oil prices fall significantly and slash ethanol profits. In this scenario, ethanol producers could choose to cut ethanol production and rely on stored RINs to fulfill RFS mandates. A run-up in RIN prices would indicate strong demand for RINs, strengthening the incentive for more ethanol and RIN production," Kauffman notes.