The People of America's Oil and Natural Gas Indusry

Fact Checking AEC’s WSJ “Fact Check”

Bob Greco

Bob Greco
Posted March 14, 2013

On March 11, the Wall Street Journal (WSJ) Editorial Board published apiece accurately explaining where the RFS came from, what the blendwall is, why it is problematic and how it can contribute to raising gas prices.  The following day, the Advanced Ethanol Council (AEC) sent the WSJ what they claimed to be a “fact check” on the editorial board’s piece titled “RIN Credits for Dummies.”  Ironically, almost everything in their fact check was wrong.

Here are some of the claims AEC made and explanations of why they are inaccurate:

1. A RIN is produced when a gallon of renewable fuel is produced. Oil companies can then split the RIN from the gallon when they buy the gallon of renewable fuel and sell it on the open market. So, in essence, the oil companies are buying and selling RINs to themselves and then complaining about it to the Wall Street Journal.

A RIN can’t be used toward complying with the RFS unless it is actually blended into domestic gasoline.  Oil companies have no reason to split the RIN from the gallon, as taken to the logical extreme, this would theoretically require them to store the ethanol indefinitely simply to obtain RINS.  The increasing price of renewable fuel credits may be an indication that refiners will breach the E10 blendwall this year. The blendwall is the point at which there isn’t enough E10 being sold to accommodate all of the ethanol mandated by federal law.  In order to comply with the law without buying RINs from the open market, an oil company has limited unattractive options:

  •  blend gasoline with more than 10% ethanol, but as Kyle Isakower, API’s Vice President of Policy Analysis, testified before the EPA, “there are serious compatibility issues with enginesfuels and retail infrastructure not specifically designed to handle blends above 10% (i.e. the vast majority of light-duty vehicles on the road today that are not flexible-fuel vehicles);
  •  produce E85, but Isakower also noted that consumers have largely rejected this fuel and refiners own less than 5% of the retail gas stations that would need to be upgraded to sell this alternative fuel; or
  •  reduce their obligation by increasing gasoline and/or diesel exports, decreasing imports, or reducing refinery production.

Both of these options could negatively affect consumers.  Now, this challenge is compounded by refiners who may be planning to “carry over” some 2013 RINs for compliance next year, when the mandates are even larger.  It’s easy to see how such rigid mandates lead to unintended consequences.

2. Oil companies can either buy a gallon of renewable fuel to comply with the RFS or buy a RIN credit on the open market. Oil companies have indeed bid up the price of RINs over the last few weeks, but they are doing so voluntarily to avoid the alternative of adding more ethanol to gasoline. Ethanol is 65 cents cheaper per gallon than gasoline today.

As mentioned above, it is not possible to comply with the RFS using only RINs from physically blended gallons without using a fuel that has serious compatibility issues with the existing vehicles on the street.  As a result, oil companies are complying with the federal law likely by using RINs that were generated last year when they used more ethanol than the RFS required.  Now, since there are serious issues with selling a fuel that has more than 10% ethanol, and the renewable fuel mandate will exceed 10% of the total gasoline supply, additional RINs cannot be created.  Consequently, the RIN market has been very tight and as with any market this has led to a sharp increase in prices.  Gasoline has recently cost $3.15/gallon, while ethanol has recently cost $2.53/gallon, meaning that ethanol has been selling at a 62 cent discount to gasoline.  What AEC doesn’t mention is that ethanol has only 66% the energy content of gasoline.  That means, using recent costs, it would have cost $3.83 in ethanol to provide the same amount of energy as a $3.15 gallon of gasoline, making gasoline the less expensive choice.  They also don’t mention that regardless of whether or not there was a price incentive to add more ethanol to the fuel; there simply are too many uncertainties associated with selling a fuel with more than 10% ethanol. 

3. The oil industry’s excuse — that it cannot blend more ethanol because of the blend wall — is smoke and mirrors. Fifteen percent ethanol blends are approved for 75 percent of today’s vehicles which together account for 85 percent of miles traveled. It’s pretty simple; the oil companies will bury the truth and gouge the consumer to avoid blending alternative fuels.

While the EPA provided a waiver allowing E15 to be sold to 2001 and newer light-duty vehicles, most automobile manufacturers have made it clear that using E15 will void their vehicle’s warranty.  AEC would benefit from reading the letters from the auto companies to Congressman Sensenbrenner as well as CRC’s reports on engines and fuel systemsmentioned above to better understand why automakers do not allow this fuel in the vast majority of the light-duty vehicles produced to date for the US market.

4. The oil companies helped design and openly supported the open market RIN credit program they are now using to attack the RFS. The problem for the oil industry is the RFS and RIN credits are working to reduce our dependence on oil, break Big Oil’s monopoly on the gas pump, and create American jobs while also reducing gas prices.

Again, AEC misses the point.  The RINs themselves are not the problem, they are a symptom of the real problem – the unrealistic mandate.  The world has changed since the RFS was envisioned in 2007.  While consumer demand for fuels has dropped, domestic supplies of crude oil have grown dramatically because of the revolution in shale oil and natural gas development in the U.S.  This has created jobs and reduced imports.

The oil industry supports the use of all economically viable energy sources, including renewable fuels, to help meet our nation’s energy demand. The industry used some 13 billion gallons plus of ethanol last year.  Our members are manufacturing ethanol, researching alternative fuels like algal-based diesel and cellulosic ethanol, and working on new fuels like biobutanol. The world is demanding more energy and we believe that all fuels are needed to be able to meet the world’s energy demands including renewable transportation fuels, wind, geothermal, solar, coal, oil and natural gas.

We are, however, for repeal of the federal RFS that mandates the use of a fuel that could potentially damage the consumers’ vehicles.