The People of America's Oil and Natural Gas Indusry

The RFS and Regulatory Uncertainty

Mark Green

Mark Green
Posted April 30, 2014

In seeking regulatory certainty, compliance with rules and deadlines and policies that acknowledge market realities, industry is hardly being unreasonable. Unfortunately, these are scarce in EPA’s setting of new ethanol use levels under the Renewable Fuel Standard (RFS).

Let’s start with deadlines. Under the law EPA was supposed to tell refiners by the end of last November how much ethanol would have to be blended into the U.S. fuel supply this year. Four months into the year, refiners are still waiting. That’s regulatory uncertainty.

Market reality? EPA continues to signal on cellulosic biofuels that the 2014 mandate will have no connection to actual commercial production – setting up an absurd situation where refiners could be penalized because a “phantom fuel” doesn’t exist in commercial volumes necessary to satisfy the mandate.

Hello, EPA, can we talk?

API’s Bob Greco, downstream group director, talked about the RFS and EPA’s still-pending 2014 ethanol use mandates during a conference call. The key issue is whether the ethanol mandates will break through the 10 percent “blend wall,” where the RFS will force refiners to produce more fuel with greater than 10 percent ethanol content, such as E15 and E85 – fuels for which most of the cars on the road today weren’t designed or warranted to use. Greco:

“I sent a letter to EPA Administrator Gina McCarthy urging her agency to limit the ethanol mandate to no more than 9.7 percent of gasoline in the 2014 renewable fuel requirements. Given the uncertainties in gasoline demand projections, continued consumer demand for gasoline with no ethanol—known as E0—and very limited demand for E85 fuel, a 9.7 percent limit represents the minimum ‘buffer’ needed to protect consumers against the economic harm and safety issues associated with exceeding the 10 percent ‘blend wall.’ … We need regulatory certainty to plan for compliance with the rule and supply the fuels Americans demand.”

EPA itself acknowledged the blend wall last fall, when it indicated it would consider significantly lowering ethanol use requirements for 2014. More recently the agency has signaled the final requirements would be higher than those it issued for public comment. Greco:

“(In the letter) I point out in our comments that predictions about gasoline demand and consumption often miss the mark. … For example, in 2013, gasoline consumption was more than 17 billion gallons lower than what was projected in 2007, when Congress passed the Renewable Fuel Standard we use today. … (The U.S. Energy Information Administration’s)  2014 Annual Energy Outlook Retrospective Review found total petroleum consumption was overestimated almost 70 percent of the time. … It’s not that EIA doesn’t do as good a job as possible predicting gasoline demand. But looking into a crystal ball isn’t a science.”

Greco said EPA shouldn’t try to “micromanage” ethanol mandates using slight changes in gasoline demand forecasts. The agency also needs to build in room in the mandate for consumers who want E0 fuel – zero ethanol content – to use in boats, recreational vehicles and yard equipment. Greco:

“These mandates set the minimum amount of ethanol that must be used each year—not the maximum. Greater volumes of biofuels could be used if the market demand is there. So it’s better to err on the side of caution with the final mandate rather than force more ethanol into gasoline than is safe.”

One troublesome part of the RFS mandate regime is the mandate for cellulosic biofuel, the annual production of which has failed to come anywhere close to the amount EPA required. Last year, for example, the RFS mandate required the use of 6 million ethanol equivalent gallons, but only 810,185 ethanol equivalent gallons were actually produced. Greco:

“The way they’re doing it now is not sustainable. … That’s bad public policy. We have said consistently EPA should be basing (the cellulosic mandate) on actual production – preferably, continuous actual production. Because that suggests that a (cellulosic) plant is up and running in some sort of stable configuration. … We need continuous production as the best benchmark, and that’s what EPA should be basing (the mandate) on. … I appreciate that we’re still hearing that this is going to be the year that (cellulosic biofuels producers) gear up and hit their numbers, but we were hearing that in 2007. That’s when we got these tremendously large mandates. So, I’d like to see actual gallons. That’s what EPA ought to be basing their mandates on.”

Greco said EPA should follow through with its proposal calling for reduced ethanol use levels to protect consumers from impacts to vehicle engines and power equipment, as well as potential harm to the broader economy. The RFS could lead to fuel rationing and supply shortages that by 2015, according to a NERA study, could drive up gasoline costs 30 percent and the cost of diesel by 300 percent.

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.