Repeal or reform the RFS

It wasn’t too long ago that the U.S. faced a much different future.  In 2007, all signs pointed to rapidly rising gasoline consumption, surging oil imports from unstable suppliers, and falling domestic production. Thankfully, those signs turned out to be wrong. Today, Americans are driving less, using less gas, and doing it all in more efficient cars.  The downside is that back in 2007, policymakers did not foresee the petroleum renaissance, and responded to the impending doom by imposing mandates requiring the increasing use of renewable fuels – mainly ethanol. The mandate is known as the Renewable Fuel Standard (RFS).

Yet Washington’s short-sighted thinking is now creating substantial problems for both the energy industry and consumers. The fundamental policy challenge stems from a regulatory regime that requires annual increases in volumetric targets in ethanol use, regardless of subsequent higher gas prices or the technical limitations of the U.S. automobile fleet.

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That’s where the problems come in. Refiners and other obligated parties like importers must, per the RFS requirements, document that they have blended ethanol into gasoline by acquiring RINs (renewable identification numbers).  Producers generate RINs when ethanol is blended into gasoline. In turn, refiners could purchase RINs in exchange for blending ethanol at levels below 10 percent.

But refiners could also blend above their mandated requirement and then either sell extra RINs or carry them over for use in the following year.  And thus the RIN market was born. Though rife with fraud, the RIN market operated for years on the periphery of American awareness. Until recently, that is.

In recent weeks RIN prices have risen from just a few pennies to $1.50 a gallon.  Thanks to Congress’ lack of forethought and the RFS’ rising ethanol targets, refiners are now facing the prospect of having to blend the biofuel at levels above 10 percent, in order remain in compliance. But the expectation of higher blending costs and the need for more credits are causing RIN prices to soar.

While the U.S. gasoline supply has been approaching 10 percent ethanol in the last two years, the supply of RINs has declined because refiners are no longer able to blend above the mandate to save their credits.   Instead, as refiners and gasoline importers approach 10 percent blending levels for ethanol, they are buying more RINs to meet the newer and higher EPA blending requirements. Indeed, very soon refiners will be forced to comply with a 15 percent blending level. As a result, the entire transportation fuels market is anxiously anticipating the approaching blend wall, and watching while RIN prices continue to climb.

In the absence of Congressional repeal, the renewable fuel standard will produce a large spike in gasoline prices. To be clear: increased ethanol levels in the U.S. fuel supply can only happen if suppliers sell a new kind of fuel with a higher ethanol content like E85 or E15.  The EPA has issued a waiver allowing the sale of E15, but U.S. automobile companies have warned that using the higher blend will violate warranties.

Moreover, consumers are resistant to fuels with higher ethanol content because of their high cost, limited availability, higher frequency of refill, and poor performance. But even if we put aside these constraints, solving the logistical challenges are enormous and unlikely. The 2014 mandate will require the sale of nearly three billion gallons of E85 in 2014, five times the expected sales volume for 2013.  This means that the 2,400 retail stations that sell E85 will have to hit a target volume 140 gallons per hour, 24 hours per day, for 365 days.  The reality is the average U.S. gas station currently sells 100 gallons of E10 gasoline per hour across all of their pumps for all fuel grades.

Fortunately, members of Congress on both sides of the aisle have begun to speak out about the need for RFS reform or repeal, but the window to act is now.  Bottom line: get ready for sticker shock in 2014 unless Congress or EPA steps in to relieve prices at the pump.

Pugliaresi is president of the Energy Policy Research Foundation of Washington, D.C.

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