Policy makers are smart to be concerned. Whether you support ethanol or oppose it, there is clearly something wrong with the way refiners and importers must demonstrate compliance with the RFS. Back in 2007, Congress enacted the renewable fuel standard as part of broader energy legislation. Each year, the U.S. Environmental Protection Agency has been ratcheting up the amount of ethanol that must be blended into gasoline, but at the same time, the recession and efficiency gains have significantly decreased demand for gasoline. No one expects that gasoline demand will rebound strongly, and there are physical constraints on safely using higher blends of ethanol. As a result, there aren't enough gallons of gasoline to put all of the required gallons of ethanol into - and that has driven the price of credits through the roof.
Without action by the EPA, the results could be particularly bad for a nation only beginning to recover from a sustained economic crisis. Higher consumer costs and lost jobs could result. And ironically, conditions like these could undermine political support for alternative fuels programs as serious consumer backlash ensues.
Valero is both the largest independent refiner and one of the largest ethanol producers in the country. We can tell you first hand that federal alternative fuels policy must strike a careful balance to encourage an orderly market for ethanol while at the same time carefully monitoring costs to protect the consumer. At Valero alone, we anticipate cost increases of some $500 to $750 million this year just as a result of volatility in the market for RINs. Unfortunately, this cost will not add one more gallon of fuel into the market. It is nothing more than a federally mandated cost to each gallon of transportation fuel that will be passed on to the consumer.
Some have suggested that the refining sector should move the percentage of ethanol blended from 10 percent to as high as 15 percent, a blend called E-15. Valero supports ethanol and have made huge investments in its production. However, as AAA recently testified before Congress, the E-15 blend is not warranted for use by 95 percent of cars on the road today. E-15 reduces engine life, and E-15 prompts fuel pump failures and misfuelings. AAA even called on EPA "to suspend the sale of E-15 until motorists are better protected." There are also issues with boats, lawn mowers, motorcycles and other small engines. Greater reliance on higher ethanol blends is not the way to go, and would likely undermine consumer confidence in alternative fuels.
No matter your view on ethanol, federal mandates can be tricky. If EPA isn't careful, great damage can be done to the economic, environmental and energy security objectives that underlay our approach to alternative fuels. It is time to revisit the renewable fuels standard in order to allow the orderly movement of ethanol into the fuel supply in a responsible manner that protects consumers and small businesses.
Klesse is chairman and CEO of Valero Energy Corp., the nation's largest refining company.