The People of America's Oil and Natural Gas Indusry

An Artificial Solution to Arbitrary Mandates

Bob Greco

Bob Greco
Posted March 18, 2013

The Renewable Fuels Association this morning tweeted:

RFA Tweet

This is in many ways progress in that it is a de facto admissionthat RIN prices are rising because we are hitting the “blend wall” on ethanol, and that a solution is needed.  Unfortunately the solution in this case is crazy.  From Platts:

Well-known energy economist Phil Verleger several years ago first brought up the likelihood that the refining industry might need to promote the sale of E85 as a way around the Gordian knot of a 10% ethanol blendwall combined with a rising mandate for the use of renewable fuels plus a decline in gasoline demand in the US…“The obvious solution to the RIN price problem involves no EPA intervention and no regulatory action at this point,” Verleger writes. “It simply calls for boosting E85 sales.”

But there is nothing simple about boosting E85 sales, which are low and projected to continue to be low. This is for several reasons; first and foremost is weak consumer demand for vehicles that use E85, over to another Platts article from February:

“US consumer demand for flex-fuel vehicles, which can run on high levels of ethanol, is not strong enough for automakers to market them in the country, representatives of several major automakers said Thursday.”

Why? Well the Mother Nature Network tells us:

Flex fuel vehicles running on E85 are noticeably less fuel-efficient than the same vehicle running on traditional gasoline — about 15 percent less efficient [According to EPA and DOE, FFVs typically get 25-30% less miles per gallon than gasoline]. When you add the reduced fuel efficiency in with the fluctuating price of E85, consumers may end up paying several hundred dollars more per year for a vehicle that only has a nominal benefit to the environment.

So demand is weak, but renewable fuel boosters have a solution, make E85 anyway and give it away:

“The situation is so convoluted that it would pay marketers to give E85 away should the RIN price rise to around $5,” [Verleger] writes.

So basically renewable fuel folks want refiners to pay them for a product and then the refiners would give it away for free. But of course it wouldn’t be free, the costs could just be spread across all other products refiners create, products that people actually want to pay for.

Verleger is correct, the situation is convoluted, convoluted beyond repair.  But having refiners supply a product beyond its demand is not much of a solution, it is just wasteful.  A real solution would start by ending the market distortions of the renewable fuel standard.