The People of America's Oil and Natural Gas Indusry

Fact vs. Fiction on the Renewable Fuel Standard

Bob Greco

Bob Greco
Posted April 19, 2013

It’ll take more than 60 seconds to debunk the main untruths in Fuels America’s video, “The Truth Behind High Gasoline Prices in 60 Seconds” – but then fact often is more complicated than fiction.

First, a few words about Fuels America. It’s a collection of groups committed to “protecting” the flawed Renewable Fuel Standard (RFS), with its broken mandates for increasing use of ethanol. The organization that includes the Renewable Fuels Association (RFA) and major corn growers is attacking America’s oil and natural gas industry – ironically, ethanol’s biggest customer. Why? Because it has identified significant problems with ethanol mandates under the RFS, which also have generated concern from auto manufacturers, consumer safety groups like AAA, farmers, grocery manufacturers, environmental non-profits, think tanks, anti-hunger groups, the California Air Resources Board and lawmakers.

The mission of Fuels America and the RFA is a no-holds-barred defense of the corn ethanol industry and the defective federal biofuels standard, not the interests of U.S. consumers. If Fuels America had its way, Americans could bear a number of adverse impacts from the RFS, ranging from costs to repair vehicle engines and fuel systems damaged by using gasoline with higher levels of ethanol, to macro-economic costs associated with continued implementation of the RFS’ ethanol mandates – including significant increases in the cost of gasoline and diesel that ripple through the economy by 2015. That’s the backdrop for Fuels America’s video.

While it purports to explain gasoline prices it barely mentions the biggest factor: the price of crude oil. Apparently, too complicated for the 60-second treatment. Check here for a thorough discussion. But as you can see in the infographic below, the price of crude has recently accounted for about 67 percent of the price at the pump.

It’s difficult to have a serious discussion about gasoline prices without discussing crude prices. So it’s not surprising that the video also dismisses the positive effects of increased domestic oil production. We’ll keep it simple: Because the laws of supply and demand also apply to crude oil markets, increased supply can exert downward pressure on crude prices – as noted above, the biggest factor in the price of gasoline. From an interview with energy analyst James L. Williams last spring:

“If we increase supply in the U.S., will there be an effect on crude markets? Absolutely. … If the U.S. increases domestic production, over time that’s going to bring prices lower. … The laws of supply and demand do work, even if it’s not as obvious as it should be. If we produce more, the price will be lower than it would have been otherwise. … I don’t care who increases oil production, it will decrease oil prices.”

Let’s move on to the video’s biggest whoppers – implying that renewable fuels are substituting for gasoline in the U.S. fuel supply and that they’ve lowered the cost of gasoline. The video:

“Because of renewable fuel use today, we’ve extended the nation’s fuel supply by 10 percent, and that helps lower gas prices by $1.09. And we’re just getting started. When you think about how renewable fuel has lowered gas prices it’s obvious why the oil industry is working so hard to block the competition.”

We dispelled the notion that ethanol replaces gasoline here. Basically, ethanol is primarily an additive to gasoline, not a replacement for gasoline. It only replaces gasoline when it’s sold as E85 (fuel that contains between 51 and 83 percent ethanol). Last year, only about 100 million gallons of E85 were sold, meaning ethanol sold as a fuel, rather than an additive, displaced just about 50.7 million gallons of gasoline (after accounting for ethanol’s lower energy content). That’s less than 0.1 percent of the 128 billion gallons of gasoline the U.S. uses every year.

A 2012 analysis by a pair of MIT professors scuttles the $1.09 claim:

“Given the obvious importance of these estimates, we investigate their robustness. We show that they are driven by implausible economic assumptions and spurious statistical correlations. Put simply, the empirical results merely reflect the fact that ethanol production increased during the sample period whereas the ratio of gasoline to crude oil prices decreased. These trends make the empirical analysis extremely sensitive to model specification; however, we find that empirical models that are most consistent with economic and statistical theory suggest effects that are near zero and statistically insignificant.”

The Council on Foreign Relations’ Michael Levi recently put it this way:

“… what’s amazing here is that (ethanol supporters) 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.”

Finally, the Fuels America video attacks the earnings of the “Big Five” oil and natural gas companies over the past decade. Lots of detail in our updated “Energizing America” primer, but over the past five years average industry earnings have been comparable with the rest of the U.S. manufacturing industry, averaging about 8 cents for every dollar of sales. The chart below shows that in the fourth quarter of last year, the industry earned 5.5 cents for every dollar of sales while the rest of manufacturing earned 7.7 cents per dollar of sales.

Who do those earnings benefit? Fuels America’s video depicts shadowy figures with money stuffed in their pockets. Accurate would have been images of everyday Americans – representing the millions of U.S. households with mutual funds, IRA or personal retirement accounts and pension plans. If you have one of these there’s a good chance they’re invested in oil and natural gas stocks. Again, probably too much detail to handle in 60 seconds.

It’s seldom useful when important public policy issues are relegated to talking points in a quick animation. Gasoline prices affect every American, and the real issue is developing national energy policies that help America become more self-sufficient and help put downward pressure on global crude prices that will benefit consumers – chiefly, through increased access to U.S. oil and natural gas reserves that will continue to grow domestic production and common-sense oversight to ensure safe and responsible development.

The RFS is simply broken, its mandates are not based in reality and its potential impacts loom large for U.S. consumers. Let’s repeal it.