The People of America's Oil and Natural Gas Indusry

Is EPA Listening on the RFS, 'Blend Wall'?

Mark Green

Mark Green
Posted October 14, 2013

Interesting analysis from Reuters, citing a leaked EPA document in which the agency indicates it may significantly reduce its biofuels mandate for 2014. The same document acknowledges that the refining “blend wall” is an “important reality,” according to Reuters. If accurate, the report suggests EPA is starting to hear what the oil and natural gas industry and a host of other voices have been saying about the flawed Renewable Fuel Standard (RFS). Reuters:

If approved, the proposed cut in the biofuel mandate in 2014 to 15.21 billion gallons from 18.15 billion would mark an historic retreat from the ambitious 2007 Renewable Fuel Standard (RFS) law that charted a path toward ever-greater use of clean, home-grown fuel, which the biofuel industry counts on to underpin bank loans and new factories.

As Reuters notes, EPA acknowledgement of the blend wall is important in the policy debate over the RFS. Ethanol supporters, who don’t want the RFS changed, have said the blend wall is a fiction created by the oil and natural gas industry. Apparently, it may not be fiction to EPA. The Reuters piece also says that a proposed reduction in the biofuels mandate would put ethanol backers in a “tough spot”:

The Renewable Fuels Association has previously argued that Congress need not amend the 2007 law because the EPA has enough flexibility under the law to make changes to reflect market realities. The agency is now exercising some of that discretion – but certainly not as proponents would like.

Basically, as long as EPA didn’t actually exercise its authority under the RFS to bring ethanol volumetric mandates into line with market reality, RFA rendered applause. But the Renewable Fuels Association’s Bob Dinneen told Reuters his group would fight an EPA rollback of the mandate. So, yeah – Big Ethanol was for EPA flexibility before it was against it.

The good news is the refining-blend-wall-as-fiction line may be one less canard RFA and its allies will use to muddy-up the public RFS debate.

Or maybe not.

Fact was hardly an impediment as ethanol supporters took to Twitter during last week’s forum on the RFS and biofuels mandates, hosted by National Journal. A sampling:

The claim is simply false, based on research discredited in an MIT study. Co-authors Christopher Knittel and Aaron Smith, an economist at the University of California-Davis, dispel the notion of reduced gasoline prices due to ethanol. MIT News:

The claim that ethanol lowers prices derives from a previous study on the issue, which Knittel and Smith believe is problematic. That prior work involves what energy economists call the “crack ratio,” which is effectively the price of gasoline divided by the price of oil. … The higher the crack ratio, the more expensive gasoline is in relative terms. If ethanol were a notably cheap component of gasoline production, its increasing presence in the fuel mix might reveal itself in the form of a decreasing crack ratio. So while gasoline is made primarily from oil, there are other elements that figure into the cost of refining gasoline. Thus if oil prices double, Knittel points out, gasoline prices do not necessarily double. But in general, when oil prices – as the denominator of this fraction – go up, the crack ratio itself falls. The previous work evaluated time periods when oil prices rose, and the percentage of ethanol in gasoline also rose. But Knittel and Smith assert that the increased proportion of ethanol in gasoline merely correlated with the declining crack ratio, and did not contribute to it in any causal sense. Instead, they think that changing oil prices drove the change in the crack ratio, and that when those prices are accounted for, the apparent effect of ethanol “simply goes away,” as Knittel says. [Emphasis added]

This is one we’ve addressed before. Ethanol is primarily an additive to gasoline, not a replacement for it. Only when you’re talking about E85 (fuel containing up to 85 percent ethanol) is ethanol actually replacing gasoline.

So let’s talk about E85. In 2012, just 100.2 million gallons were sold. That means ethanol sold as a fuel, rather than as an additive, displaced 50.7 million gallons of gasoline that year – after accounting for ethanol’s lower energy content. Here’s your context: The U.S. uses about 352 million gallons of gasoline every day.

Another point: Every barrel of crude oil yields a range of products, from gasoline to car tires, heating oil and more. So there really isn’t a circumstance where ethanol could replace a single barrel of crude oil. Further, the U.S. is currently producing more than 7 million barrels of oil a day. Claiming that all ethanol consumed is displacing “imported oil” is disingenuous – domestic oil production is doing the displacing.

This probably comes from the fact that the federal ethanol tax credit went away after 2011. But the claim ignores the elephant in the room – the very heart of what the RFS does, which is far better than a tax credit: It mandates ever-rising ethanol demand. The aforementioned Aaron Smith, in an article for the American Enterprise Institute’s online magazine:

Deficit hawks, environmentalists, and food processors are celebrating the expiration of the ethanol tax credit. This corporate handout gave $0.45 to ethanol producers for every gallon they produced and cost taxpayers $6 billion in 2011. So why did the powerful corn ethanol lobby let it expire without an apparent fight? The answer lies in legislation known as the Renewable Fuel Standard (RFS), which creates government-guaranteed demand that keeps corn prices high and generates massive farm profits. Removing the tax credit but keeping the RFS is like scraping a little frosting from the ethanol-boondoggle cake.

And Kevin Drum, writing in Mother Jones:

In other words, the mandates have grown so large that the tax credits barely made a difference anymore. Demand for ethanol is driven by the mandates, not by the tax credit. When you take away the tax credit, nothing happens: Demand stays high because the law says so, corn prices go up accordingly, and corn farmers stay rich.

A real whopper, which apparently is invulnerable to fact, but we’ll give it another go.

In 2011, EPA set the mandate for cellulosic biofuels at 6.6 million gallons. That year, no cellulosic biofuel was commercially produced. Undaunted by the absence of a commercial cellulosic biofuel market, EPA set the 2012 mandate at 8.65 million gallons. Last year, 1,000 gallons were commercially produced. Earlier this year the U.S. Court of Appeals rejected EPA’s 2012 mandate for cellulosic biofuel, saying the agency is not allowed to “let its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.” Even so, EPA set the 2013 mandate at 4 million gallons. So far this year just 140,000 gallons have been produced – or 3.5 percent of the mandate.

Sure, some cellulosic biofuel is commercially available, but the RFS mandate for it remains utterly unattached to market reality – like so many of the claims from defenders of the broken, unworkable, unsalvageable Renewable Fuel Standard.

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.