The People of America's Oil and Natural Gas Indusry

The Ethanol Whitepaper Whitewash

Bob Greco

Bob Greco
Posted April 3, 2013

The Renewable Fuels Association (RFA) is no friend of its biggest customer, the U.S. oil and natural gas industry. That’s clear from the ethanol lobby’s attacks on our industry for raising questions about E15 gasoline (up to 15 percent ethanol) and the ethanol “blend wall,” addressed here, here and here. So, we were pleasantly surprised with last week’s RFA whitepaper showing that, yes – the high price of federal ethanol credits is increasing the cost of gasoline.

Quick review. Another study released last week, from NERA Economic Consulting, found that the fuel market is nearing the point where refiners no longer can satisfy ethanol blending mandates under the Renewable Fuel Standard (RFS) without elevating the ethanol content in gasoline to higher than 10 percent. According to NERA, the “blend wall” will bring about a shortage of Renewable Identification Numbers (RINs), the federal credits refiners receive for blending each gallon of ethanol – resulting in skyrocketing RIN prices that the study said will drive an increase in the cost of fuel in the future. On that basis, NERA predicts continued implementation of the RFS, with its mandates for increased ethanol use, will:

  • Decrease U.S. GDP by $270 billion in 2014 and $770 billion in 2015.
  • Decrease household consumption by $1,300 in 2014 and $2,700 in 2015.
  • Decrease worker take-home pay by $27 billion in 2014 and $580 billion in 2015.

NERA:

“At that point in time obligated parties will not be able to meet market demand for transportation fuel and still remain in compliance with the (RFS). Therefore, after exhausting all other available options for compliance, individual obligated parties, each acting independently, could be forced to reduce their RIN obligation by decreasing the volume of transportation fuel supplied to the domestic market – either by reducing production or exporting. As domestic fuel supplies decrease, large increases in transportation fuel costs would ripple through the economy imposing significant costs on society.” (Emphasis added)

Not so, said RFA, trotting out the whitepaper from Informa Economics – which, according to RFA, showed that:

“… the Renewable Fuel Standard in general and RINs in particular have not been a demonstrable factor in the rise in retail gasoline prices that has occurred in early 2013.”

Some news outlets picked up on RFA’s RINs claim, but they should’ve given the document a closer read. It actually shows that high RINs prices already are increasing the price of gasoline. While NERA didn’t specifically analyze whether the RFS and, specifically, high RINs prices were raising the price of gasoline for consumers today, the RFA whitepaper said it is – up to 2 cents per gallon.

Let’s dig into the Informa study’s key claims a little deeper:

Don’t worry, just wait – Informa implies that RIN prices will come down in the future and the cost impact on gasoline will decrease. It says the RIN prices cited are “far above any experienced in the history of RIN trading.”

They’re right about published RIN prices hitting historic highs. They’ve gone from 3 cents apiece to more than $1 before retreating recently to about 70 cents – in less than a year. The notion that these prices will decrease in the future directly conflicts with NERA’s conclusion – that the impending “blend wall” and the associated scarcity of RINs will continue to drive up the cost of gasoline production. Indeed, NERA estimates a 30 percent increase in the cost of gasoline by 2015.

2 cents’ worth – Informa’s finding that high RINs prices are raising the cost of gasoline between $0.004 and $0.2 per gallon now could look tame compared with what might come in the future. Here’s why.  Informa’s study is based on the assumption that at the end of 2012 between 77.5 percent and 85 percent of the RIN inventory was held by obligated parties and that those numbers will remain steady, at between 70 percent and 85 percent, through 2013. Thus, obligated parties would need to get less than a quarter of their RINs on the open market and could amortize that cost across their entire fuel pool.

Yet, if the percentage of RINs held by obligated parties is substantially lower, they would have to get more RINs on the open market. And then, by Informa’s calculations, there could be an even greater cost-per-gallon impact than its whitepaper shows.

Ethanol savings – The whitepaper claims that despite high RIN prices driving up fuel costs, the lower price of a gallon of ethanol, compared to the price of a gallon of gasoline, will result in a net savings for consumers. We’ve thrown a flag on that claim before – pointing out that because of the lower energy content of ethanol and the consequent impact on vehicle fuel economy, any ethanol savings benefit dangled in front of consumers is a mirage. The Council on Foreign Relations’ Michael Levi:

Let’s start with the biggest whopper. The white paper observes that wholesale gasoline (they measure this in Chicago) was $2.81/gallon on average this year, while wholesale ethanol cost $2.37/gallon. They thus claim that blending ethanol into gasoline lowers prices. Set aside for a moment some subtle issues about how prices are set; what’s amazing here is that they apparently don’t account for the fact that a gallon of gasoline has 50 percent more energy than a gallon of ethanol. Blending ethanol lowers the price of a gallon of fuel – but that gallon of fuel now gets you less mileage in your car. The net result is to increase the cost of driving. Claiming in this way that ethanol blending lowers fuel costs is like claiming that buying smaller boxes of cereal lowers the cost of getting yourself a nutritious breakfast.

Let’s do an apples-to-apples comparison of gasoline and ethanol by looking at them an energy-equivalent basis. The day the Informa study was released, gasoline cost $3.12 per gallon and ethanol cost $3.95 per gallon – converted to account for energy content. And again, Informa ignores other RIN costs, such as the potential impact to supply – while the NERA study attributes a reduction of more than 50 percent in the U.S. fuel supply to RFS implementation.

Bottom line: Look at the two studies together. Informa’s whitepaper concedes that the RFS and specifically, high RINs prices, are raising the price of gasoline right now. NERA concludes that high RINs costs stemming from the “blend wall” will have detrimental economic effects in the future.

The RFS is bad policy for consumers. And blending more gasoline with higher ethanol content (E15 and E85) to meet RFS ethanol mandates, as RFA urges, isn’t the answer. Research shows E15 could damage vehicle engines and fuel systems. Groups including AAA, the American Motorcyclist Association and automakers have raised the alarm. Meanwhile, consumer demand for E85 is weak and is projected to remain that way.

The RFS is irretrievably broken, its mandates are unworkable, and it should be repealed.

ABOUT THE AUTHOR

Bob Greco is group director of downstream and industry operations at the American Petroleum Institute. With 21 years of experience, Bob directs activities related to refining, pipeline, marketing, and fuels issues. He has managed exploration and production activities, policy analysis, climate change issues, marine transportation, refining, gasoline and jet fuel production issues and Clean Air Act implementation efforts. Before coming to API, Bob was an environmental engineer with the U.S. Environmental Protection Agency, with expertise in automotive emission control technologies. He has a M.S. degree in environmental engineering from Cornell University and a B.A. in biology from Colgate University.