Gevo, Inc. (GEVO), Valero Energy Corporation (VLO) & The RFS Reform Bill

Page 1 of 2

The Renewable Fuel Standard, or RFS, was first passed in 2005 to mandate the use of biofuels in America’s transportation sector. Despite being amended in 2007, it still has some pretty big flaws that need to be addressed. Now, four members of Congress have drafted legislation that seeks to make some pretty important changes. The proposed bill is far from perfect, but it could devastate the country’s biggest ethanol producers and even disrupt the global ethanol market. Here’s what investors need to know and two potential opportunities to keep in mind.

Renewable Flawed Standard
There’s no debating that the RFS has done exactly what it was designed to do: create a market for American biofuels. In just a few short years, the United States went from a marginal producer of ethanol to the world’s largest, surpassing even the mighty Brazil.

Source: Energy Information Administration.

The mandate caps corn ethanol production at 15 billion gallons per year, which is smart and necessary. However, current laws dictate that an additional 16 billion gallons per year of second-generation cellulosic ethanol must be produced by 2022. That brings the total amount of ethanol produced to 31 billion gallons per year and poses several problems.

That thing called math
Sure, ethanol blends could be increased from the mandatory 10%, or E10, to a still safe 15%, or E15. But even then, producers would be swimming in ethanol. The problem is that the original mandates called for growing fuel consumption — perfectly in tune with reality in 2005 — but increased efficiency and decreased driving have actually sent fuel consumption in the opposite direction.

Looking at historical gasoline consumption and ethanol production demonstrates the misguided targets of the current mandate. If America were to use all of the ethanol it produced in 2022, annual gasoline consumption would have to swell to 200 billion gallons! The new fuel efficiency targets announced last year should actually cut consumption to half of that amount.

Year Finished Gasoline Sold (Billion Gallons) Fuel Ethanol Sold (Billion Gallons) Approximate Blend Ratio
2005 140.411 4.040 2.88%
2006 141.841 5.615 3.96%
2007 142.349 6.960 4.89%
2008 138.182 9.838 7.12%
2009 137.917 11.136 8.07%
2010 137.900 12.915 9.37%
2011 133.940 12.90 9.63%
2012 133.9 13.018 9.70%

Source: Energy Information Administration. Fuel ethanol sold equals production less net imports.

The blending requirements could be lowered relatively easily. Unfortunately, they represent only one major flaw. The RFS heavily favors ethanol while neglecting to give equal opportunities to other, potentially better biofuels. You’d never know it from current laws, but the EPA considers methanol, butanol, hydrogen, natural gas, and even electricity as renewable fuels. By making detailed procedures for ethanol, the government has inadvertently abandoned these other alternative fuels that can be compatible with current engines and infrastructure, as well as cheaper, cleaner, or more energy-efficient.

The RFS Reform Bill is a good start, but …
A group of lawmakers from both parties proposed legislation to overhaul the mandate. The bill intends to slash the production mandate by 42%, limit blends to E10, and completely disallow corn ethanol from the mandate. At face value, the proposed law has good intentions and addresses the 31 billion-gallon elephant in the room, which lawmakers will have to deal with eventually.

Unfortunately, the bill does little to encourage research into or the eventual adoption of other alternative fuels. The early transcripts from the bill also show that it is deeply rooted in the food-versus-fuel debate. Ethanol critics love to point out that more than 40% of the country’s corn crop goes to ethanol. But it’s a bit misguided to stop counting there. Ethanol producers only want the starch in corn. Once that’s extracted with enzymes, the corn is dried again and sold back to farmers as animal feed. Thus, the net acreage devoted to ethanol is really closer to 17%.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!