Biofuel Mandates: Out of Sync With Transportation Landscape
In 2005, the Renewable Fuel Standard (RFS) was enacted so that transportation fuel like diesel and gasoline will contain renewable fuel. The motives behind this were to reduce America’s dependence on foreign oil markets, improve climate initiatives, and bring gas prices down.
However, over time it became evident that the forecasts that the RFS was built on were largely incorrect. This infographic from AFPM dives into the world of biofuel and breaks down why the current policies are out of sync with modern transportation.
But before we begin, let’s first explore the basics of biofuels.
What Is Biofuel?
Biofuel is transportation fuel derived from biological resources, like plants. This is in contrast to fossil fuels like gasoline and diesel, which are made up of nonrenewable petroleum. In addition, biofuels break down into conventional biofuels and advanced ones.
Conventional biofuels are any fuel derived from starch feedstocks like corn and grain. In fact, ethanol derived from corn represents one of the largest components of the biofuel market in America. For instance 97% of gasoline in the U.S. contains ethanol and 94% of that ethanol comes from starch in corn grains.
Advanced biofuels are second generation biofuels. They’re considered more complex, and come from non-food biomass like plant materials and animal waste. More advanced technologies are required to extract fuel from these resources. However, the impact on the food chain is minimized.
Here are two examples of advanced biofuels:
- Biomass-based diesel: A diesel fuel substitute made from renewable feedstocks
- Cellulosic biofuel: Fuel that is often derived from cellulose or other non food-based renewable feedstock
The Ethanol-Gasoline Dilemma
Since the 1990s, the amount of ethanol in gasoline has creeped upwards of 10% from less than 1%. This is a problem that stems from gallon specific mandates. As the amount of gasoline consumed in the U.S. declines, ethanol’s portion of the fuel mix represents a larger portion of the overall pie.
|Year||Ethanol consumption (billions of gallons)||Ethanol consumption (% of motor gasoline)|
The bulk of automobiles on U.S. roads as well as water-born engines have what’s referred to as an ethanol limit—the highest ethanol blend a vehicle can safely be fueled with. E10, which is 10% ethanol, is the recommended limit for most existing cars today. And filling up with anything higher may lead to corrosive damage, extensive repairs, and engine failure.
We Have A Problem: Biofuel Mandates Are Too Big
The 10% limit is an issue most didn’t anticipate at the time the RFS came to be, and here’s why things are going awry.
RFS mandates are out of touch with supply and demand dynamics. Biofuel and ethanol consumption in America is near all-time-highs with some 12 billion gallons consumed in 2020. At the same time, gasoline demand is some 30 billion gallons below the forecasts when the RFS passed.
What’s more, this is leading to unintended consequences and ineffective business practices:
- First, a surge in advanced biofuel imports is occurring. Given the RFS mandate requires more ethanol than the U.S. gas supply can absorb, refiners are forced to pay hefty fees for advanced biofuels from foreign markets. In 2020, the cumulative cost stood at a staggering $5.3 billion, nearly 15x the amounts imported in 2011.
- Second, these exorbitant import costs are being passed on to consumers in the form of higher fuel costs. For example, the RFS obligations have led to an average 20 cent per gallon increase in 2021.
- Third, fuel manufacturers are paying billions of dollars in compliance credits to satisfy the RFS’ obligations. In many cases, this expense is greater than total labor and wages expenses and threatens to make businesses in this space anti-competitive.
Reform: Bringing RFS Mandates In Line With Reality
When congress passed the RFS in 2005, few, if any, could have predicted the state of energy markets today.
Key projections like increasing fuel consumption and decreasing domestic crude oil production failed to transpire. As a result, the RFS needs to undergo urgent reform in order to be better aligned with the realities of modern gasoline and diesel markets.
For more information, visit afpm.org
Retirement Spending: How Much Do Americans Plan to Spend Annually?
Retirement expenses can vary significantly from person to person. In this graphic, we show the range of expected retirement spending.
Americans’ Expected Annual Retirement Spending
Planning for retirement can be a daunting task. How much money will you need? What will your retirement spending look like?
It varies from person to person, based on factors like your health, outstanding expenses, and desired lifestyle. One helpful trick is to break it down into how much you estimate you’ll spend each year.
In this graphic from Personal Capital, we show the expected annual retirement spending of Americans. It’s the last in a three-part series that explores Americans’ spending and savings.
The Range of Retirement Spending
To determine how much people expect to spend, we used anonymized data from users of Personal Capital’s retirement planning tool. It’s worth noting that these users are proactive regarding financial planning. They also have a median net worth of $829,000 compared to the $122,000 median net worth of the U.S. population overall.
Here is the range of expected annual retirement spending.
|Expected Annual Retirement Spending||Percent of People|
Users are a mix of single individuals and people in a relationship. In all cases, expected retirement spending is what the household expects to spend annually.
The most commonly-cited expected spending amount is $60,000. Interestingly, this is roughly in line with what Americans spend annually on their credit cards. This suggests that people may be using their current bills to help gauge their future retirement spending.
Median spending, or the middle value when spending is ordered from lowest to highest, falls at $70,000. However, average spending is a fair amount higher at $100,000. This is because the average is calculated by adding up all the expected retirement spending amounts and dividing by the total number of users. Higher expected spending amounts, some in excess of $300,000 per year, skew the average calculation upwards.
Of course, given their higher net worth, it’s perhaps not surprising that many Personal Capital users expect to spend larger amounts in retirement. How does this compare to the general population? According to the Bureau of Labor Statistics, Americans age 65 and older spend about $48,000 per year on average.
Chances of Retirement Success
Once you’ve determined how much you’ll spend in retirement, your next step may be to wonder if your savings are on track. Based on an assessment of Personal Capital retirement planner users, here is the breakdown of people’s chance of success.
The good news: more than half of people have an 80% or better chance of meeting their retirement spending goals. This means they have sufficient financial assets and are contributing enough, regularly enough, to meet their expected spending amount. The not so good news: one in five people has a less than 50% chance of meeting their goals.
This problem is even more troublesome in the overall U.S. population. Only 50% of people have a retirement account, and the Center for Retirement Research at Boston College estimates half of today’s workers are unprepared for retirement.
Setting Your Own Retirement Spending Goals
While seeing the goals of others is a starting point, your annual retirement spending will be very specific to you. Not sure where to start?
Financial planners typically recommend that you should plan on needing 70-80% of your pre-retirement income in retirement. This is because people generally no longer have certain expenses, such as commuting or childcare costs, when they retire. However, keep in mind your expenses could be higher if you still have a mortgage, encounter unforeseen medical expenses, or want to splurge on things like travel when you retire.
It requires some upfront planning, but being realistic about your retirement spending can give you confidence in your financial future.
Navigating Market Volatility: Why ETFs Are Critical Tools
Historically, the trading volume of ETFs has spiked during market volatility. We explore why ETFs are preferred by institutional investors.
Download the ETF Snapshot for free.
Why ETFs Are Critical Tools During Market Volatility
Investors experienced record-breaking volatility in 2020. During COVID-19 market turbulence, the CBOE Volatility index surpassed the previous peak seen in 2008.
In this infographic from iShares, we explore how ETFs rose in popularity during this time—and the characteristics that make them particularly useful during market volatility. It’s the first in a five-part series covering key insights from the ETF Snapshot, a comprehensive report on how institutional investors manage volatility.
To assess how institutional investors navigated this volatility, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.
For instance, here is how responses broke down by location:
- 21% Asia Pacific
- 36% North America
- 29% Europe, Middle East and Africa
- 14% Latin America
Here’s what the survey found.
Rebalancing During Market Volatility
In total, 90% of institutional investors said they rebalanced their portfolios between the first and third quarter of 2020. How did they do it?
Among all financial tools, ETFs were the most popular vehicle for rebalancing. For instance, ETFs were used by 70% of investors globally, compared to the 51% who used mutual funds or derivatives.
The popularity of ETFs was evident in market activity. From January to March 2020, ETFs as a proportion of total equity trading volume increased.
|January 2020||February 2020||March 2020|
|ETF trading volume||$95B||$136B||$240B|
|ETF as % of equity volume||26%||27%||36%|
Based on an average of daily values. Reflects all listed U.S. ETFs across all asset classes.
This trend is true historically as well, as ETF trading volume has typically spiked during periods of volatility.
Want more institutional insights into ETFs?
Download The ETF Snapshot for free.
The Attributes Driving ETF Usage
Why are ETFs preferred by institutional investors? They offer three key characteristics:
- Liquidity: ETFs make it much simpler to buy and sell large portfolios instantly, instead of trading individual securities.
- Transparency: Among multi-asset managers, transparency of holdings is the top reason for using ETFs. A clear holdings breakdown helps these managers achieve exposures to particular asset classes, sectors, and styles.
- Efficiency: ETFs can be traded quickly. They typically also have lower transaction costs relative to the underlying basket of securities.
Based on these key benefits, ETFs were an invaluable tool during extreme market volatility.
ETFs are also poised to help institutional investors navigate the market going forward. Globally, 65% of institutional investors plan to increase their use of ETFs in the future.
In fact, this is already coming to fruition. As of September 2021, the average daily trading volume of ETFs was up more than 5% compared to 2020.
Evidently, ETFs play a critical part in helping institutional investors achieve their goals.
Download the ETF snapshot for free.
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