Biofuel Demand Destruction 2.0: History May Rhyme, But the Music is Different
The biofuels industry faces a potentially severe demand shock in 2025 that could dwarf the impact of the Trump administration's first experiment with Small Refinery Exemptions (SREs). In a comprehensive analysis published by farmdoc daily at the University of Illinois on February 12, 2025 (https://farmdocdaily.illinois.edu/2025/02/biomass-based-diesel-demand-destruction-2-0.html), agricultural economist Scott Irwin quantifies that the previous SRE period resulted in 1.73 billion gallons of biomass-based diesel demand destruction. Looking at current market conditions, the scale of potential demand destruction ahead appears even more concerning.
The previous SRE-driven demand destruction occurred despite the presence of the $1/gallon Blenders Tax Credit and more permissive regulatory treatment of imported feedstocks. Today's market must navigate not only the complete absence of the tax credit but also face new restrictions on imported Used Cooking Oil under the 45Z credit framework. These changes come at a time when the industry has dramatically expanded its production capacity, particularly in renewable diesel, making it more vulnerable to demand shocks.
The numbers tell a sobering story. During the 2017-2020 SRE period, Irwin's analysis shows biomass-based diesel blend rates fell by 1.3 percentage points, translating to roughly 5.76 million metric tons of lost demand and $6.7 billion in foregone revenue. Current market conditions suggest the potential impact could be substantially larger. With renewable diesel plants already operating at only 60% capacity and facing squeezed margins without the tax credit, the industry appears particularly exposed to any policy-driven demand reduction.
Adding to these headwinds, recent trade restrictions from Indonesia and China have complicated the feedstock supply picture, while palm oil-based feedstocks face increasing scrutiny in key markets. These supply challenges coincide with generally higher production costs across the board, making it more difficult for producers to weather periods of reduced demand by cutting prices, as they did during the previous SRE period.
What some might view as a potential silver lining - state-level low carbon fuel standard programs - may offer less support than initially appears. These programs, particularly California's LCFS, are currently sitting on substantial banks of credits that do not expire. This oversupply situation means these programs are unlikely to generate sufficient price signals to offset the combined impact of lost federal tax credits, feedstock restrictions, and potential SRE implementation. Early market indicators suggest the demand destruction could be far more severe than the previous SRE period, potentially reaching 1 million metric tons per month as the industry grapples with 45Z implementation uncertainty. This rate of demand loss would dwarf the previous SRE-era impact of 5.76 million metric tons over two years. With the presence of banked LCFS credits effectively muting what might otherwise serve as a natural market response to reduced biofuel supply, the industry appears poised for unprecedented demand contraction that could reshape the market for years to come.
Market Update (February 12, 2025): Despite D4 RIN prices strengthening to 88 cents per gallon today, biodiesel production margins remain deeply negative at -17 cents per gallon on a screen price basis. This fundamental disconnect between RIN values and production economics underscores the severity of the current market distress. Even with RINs approaching 90 cents, producers cannot achieve breakeven operations, suggesting that without significant policy clarity around 45Z implementation or major shifts in feedstock prices, the projected demand destruction up to 1 million metric tons per month could materialize sooner rather than later.
