What’s next for biofuels? 8 Scenarios for a Post COVID-19 World

By Steve Hartig, Senior Consultant at ReCon Associates

Special to The Digest

 This has been a dramatic time in gasoline and ethanol with demand dropping quickly due to COVID 19 and the related shutdown. It is impossible to know what is going to happen ahead but what we can do is to create some scenarios.

Volume for ethanol was generally healthy in 2019 with summary statistics from the EIA/EPA/USDA:

As the shutdowns took affect motor gasoline volumes dropping like a rock and only recently started coming up off the bottom.

Looking ahead, the main drive for ethanol demand will be light vehicle miles driven however the EIA estimates annual improvements in fuel economy of between .5-1% over the next ten year. In the last few years, depending on the period analyzed, light vehicle mileage has slowly increased roughly matching the improvements in fuel economy leading to slow/no growth for gasoline volumes.

Below is an excerpt from a chart in the 2018 US DOT Annual Transportation survey:

Cars and air travel dominate with air travel growing rapidly, car and bus growing slowly and transit and rail stagnant.

It is difficult to find good data on the exact purposes of travel by mile but the DOT 2019 Summary of Travel Trends indicates household travel as follows:

I think when discussing scenarios, it is reasonable to roughly look at two periods:

1. The rest of 2020 and 2021 while COVID 19 is still with us and a vaccine or cure is not widely available. In this time period, it seems likely mileage will increase from today’s low but at a slow pace.
2. 2022 and beyond which will be our new normal.

Two relevant trends that started before this are:

• Working from home which the DOT estimates has increased from around 2-3% in 1995 to 10-15% in 2017. This will directly reduce vehicle mileage and is more likely to take place with individuals with a longer commute.
• Shopping from home and E Commerce. This will reduce light vehicle miles but have little impact or an increase in trucking mileage.

What are some scenarios that can be considered for the post 2022 period?

• Working from home (WFH) has been proven over this period to function but is not always optimal. A realistic scenario is an increase in working from home, particularly in hybrid models where people work some days in the office and some at home. A 10% increase in WFH could equal about a 3% reduction in vehicle miles.
• An increase in E commerce combined with people consolidating shopping trips. A 10% increase in this might be a 1-2% reduction in light vehicle miles. While trip consolidation is a one-time affect, E commerce is expected to continue to grow at a rate between 5-10% per year which will continue to reduce automobile miles.
• People may be hesitant to travel by plane for shorter trips, for instance, less than 8-12 hours. If 10% of domestic air travel was replaced by car trips it would increase light vehicle miles by about 1.5%.
• Gas mileage has been increasing between .5-1% per year with the EIA expecting it to increase. It is reasonable to estimate that a reduction in new vehicle sales due to the coronavirus financial fallout combined with the new proposed EPA gas mileage standards would keep this closer to .5% per year which will continue to pressure gasoline volume as this increases each year.
• Longer term, electric vehicles will take share from liquid fuels. Last year about 325,000 electric vehicles were sold which is equivalent to about .1% of the vehicles on the road. There are very conflicting predictions of growth dependent on government incentives and expected improvements in cost and range but all predict that electric vehicles will start taking significant share of the market in the 2030-2040 range.
• It seems somewhat unlikely that a replacement of mass transit by personal car travel would have a significant impact. The majority of travel is by buses which is commonly used for shorter trips in major cities where parking is expensive and not very available. Also, many people taking buses do not own cars.
• Exports in 2019 were the second highest in the last ten years with main destinations being Brazil, Canada, India and South Korea. Given tough economic conditions in the coming years globally and low oil prices, it seems there is likely more downside risk than upside opportunity.
• Finally, oil prices will likely be low over the coming years short term due to the huge amount in storage and longer term due to competition between OPEC, Russia and US fracking. Lower gasoline prices can tend to increase overall miles driven particularly around longer trips. Particular to ethanol, low oil prices would reduce the price attractiveness of higher-level ethanol blends.

As these are only scenarios it is impossible to come to clear conclusions and we will have to monitor them over the coming years. However, it is not unlikely that the peak year for gasoline volume in the US is in the past given the combination of trends.

Biofuels plants will need to look at opportunities for revenue and product diversification to drive maintain profitability. Projects around low carbon scores, corn fiber ethanol and animal feed fractionation will become increasingly important.   It is likely some of the higher cost plants may stay closed long term. Further consolidation is probably less likely as it is not clear why any of the major ethanol producers would want to, and perhaps be financially able to, purchase more ethanol capacity.

On the optimistic side for biofuels, while jet fuel volume has dropped by about two thirds in volume over the last months and will have a long slow path back, diesel fuel both for vehicles and shipping has seen a relatively minor drop in volume which will likely come back as the world economies open back up. This make the various projects under way to grow renewable diesel and to find new paths to distillate fuels even more important.