False Alarms vs Hard data: the Renewable Fuel Standard, the results, and the critics

All those worries about the impact of biofuels on food prices, deforestation, Gulf hypoxia?

The hard data is in – and looks good – and lots more too.

In Washington, the Energy Independence and Security Act of 2007 turned six this past week. The centerpiece of EISA was a greatly expanded Renewable Fuel Standard — known as RFS2, which required rapid growth in the consumption of renewable fuels, culminating in 36 billion gallons in 2022. In addition, the law required renewable fuels to meet certain environmental performance thresholds and created specific categories for cellulosic and advanced biofuels.

While the Act passed the Senate on a vote of 86-6 and the House on a vote of 314-100, there was carping at the time — and ever since — about the impact of RFS2 on food prices, agricultural subsidies, hypoxia in the Gulf Of Mexico, starvation in Mexico, Amazon deforestation, whether it would have any real impact on oil imports and create any jobs in the areas where production of said biofuels would occur.

RFS2 fuels have been described as “fantasy fuels”, “government fuels”, derided as “farmer fuels”. Biofuels in general have been, for their proposed effects on world food prices, been described as a “crime against humanity”, and recently a research group affiliated with petroleum interests predicted a global negative impact of billions and billions of dollars — in essence, the greatest GDP setback in the history of the world, should the RFS not be repealed or waived.

As we do here in Digestville, let’s look at the data. The Renewable Fuels Association has assembled quite a bit of hard data this week — let’s see indeed what the tale of the tape actually is.

Keeping in mind, always, that measuring a key national policy after six years is — well, like measuring the US’s containment policy with respect to the Soviet Union in the mid-1950s — instead of in 1992. And remembering that Chinese premier Zhou En-Lai, when once asked in the 1970s what he felt were the historical impacts of the French Revolution, smiled and replied “it’s too soon to tell.”

Fuel Production

Clearly, in keeping with RFS2 targets, there has been a substantial impact in US ethanol production, and production facilities. Production of ethanol has doubled since 2007, as has the availability of animal feed as a co-product, and jobs are up 60%. Advanced biofuels production (primarily biodiesel) has more than doubled. As a cautionary note, keep in mind that “ethanol industry jobs” means both direct, indirect and induced jobs — and had the same amount of corn been diverted to, say, the foreign markets — we would have seen increased economic activity as well, just not the same amount of impact.

Agricultural impact

Now, if you had been reading only documents of RFS2 critics, you would expect to see a US prairie awash in corn, and a depression in livestock value owing to high corn prices.

In fact, corn prices are up modestly in the period, just 4.8 percent. Compare that with a US overall inflation of 11% for the period and a 49.9% run-up in oil prices.

As for the world awash in corn? US agricultural land is actually down 4.5 percent — and almost the entire increase in corn production (up 7.3 percent) is accounted for by rising per-acre yields (up 6.4%).

Livestock owners? The gross value of livestock has risen 31 percent during the period.

Environmental issues

Again, according to anti-RFS dogma, the RFS will lead to an increase in hypoxia in the Gulf of Mexico, killing off the fish industry; through indirect land use change, it would contribute to Amazonian deforestation. While having next to no impact on CO2 emissions.

According to the hard data from NOAA, the hypoxia zone has decreased 26.6 percent in size during the period; according to Brazil’s National Institute of Space Research, through 2012 Amazonia deforestation has been reduced from 4498 square miles in 200-7 to 1798 in 2012, a drop of 60 percent.

Meanwhile, US CO2 emissions have been reduced by nearly 11 percent overall, and the rate that ethanol reduces direct CO2 emissions compared to gasoline has increased from around 25 percent in 2007 to 34 percent today, according to the US Department of Energy.

Fuel prices

According to critics, ethanol (as a subsidized “farmer fuel”) would increase fuel prices.

Since 2007, oil prices have risen 49.9%, but retail diesel prices have risen only 35.6 percent and gasoline prices have risen only 25.2 percent.

A contributing factor? Biofuels. The rack ethanol price, in the same period, has risen only 10.3 percent — again, compare that to fuel prices as a whole and to core US inflation during the period of 11 percent.

Oil Imports

One stated goal of RFS2 was to drastically reduce oil imports, which had risen to 66.2 percent by 2007. Today? Down to 51 percent. Most of that is accounted for by a US oil and gas boom. But roughly a third of it can be directly attributed to ethanol, which has jumped from 4.6% of the gasoline supply in 2007 to 9.7 percent today.

Food prices

If there has been one area of concern for US consumers in terms of support for increasing the use of biofuels in the energy mix, it has been in terms of the supply and pricing of food.

So, let’s look at the hard data from the UN’s Food & Agriculture Organization, the USDA and the Bureau of Labor Statistics.

Overall, world food prices have risen just 7.8 percent since 2007 — well below the benchmark US general inflation rate of 11 percent.

A number of critics have pointed to a 13.8 percent rise in “food at home” food prices as indicative of the impact of biofuels — but’s look a little deeper. Let’s look at overall US food spending. That’s up, too, from $6,133 to $6,599 per household per year. But that’s an overall rate of 7.6 percent — well below the general inflation rate.

Meanwhile, it’s useful to look not just at overall food prices, but foods that, according to critics, would face soaring consumer price impact owing to the run-up in corn prices. Milk, egg, chicken and pork producers have been bitter critics of RFS2 on this score.

According to the BLS, milk prices are down 11 percent, eggs are down 8.3 percent, chicken is up 8.2 percent and pork chops are up 9.2 percent during the 2007 to 2013 period. All below the US general inflation rate.

In fact, it is quite tempting to wonder the impact that oil prices are having in driving up milk, egg, chicken and pork chop costs — via energy for farming, harvest and processing, wholesale transportation and distribution, and energy for retail operations and transport.

The Bottom Line

One of the reason all of this is of particular interest: in 2015, the US corn portion of the renewable fuel standard is supposed to be capped at 15 billion gallons. In reaching 13 billion gallons to date, the corn ethanol producers have almost reached that cap — and the economic impacts going forward on secondary markets like eggs, milk and so forth will be muted. The big biofuels sources driving the RFS2 targets from here on in will be, generally, cellulose and waste from here.

Though there will be increased opportunities for corn to supply advanced biofuels through corn oil extraction, and conversion of starch ethanol plants to biobutanol.

But, by and large, the data for now should be broadly indicative of the corn impact going forward — there just isn’t going to be all that much change in corn demand for biofuels in the US, going forward.

Whether these economic impacts add up for you as “an indication of a successful policy,” or not — that’s for you to choose. What is emphatically clear is that nearly all the dire impacts predicted by RFS2 critics have turned out to be “false alarms”.

And, to some extant, a case of falsely crying “fire” in a crowded theater.