The People of America's Oil and Natural Gas Indusry

RFS Dysfunction on Display

Mark Green

Mark Green
Posted December 12, 2014

Things got pretty bumpy for Janet McCabe, EPA’s acting air chief, during her House subcommittee appearance this week, where she talked about the agency’s failure to issue 2014 ethanol-use requirements under the Renewable Fuel Standard (RFS).

The requirements were nearly a year overdue when EPA abandoned the effort altogether last month. Instead, EPA said it will complete the 2014 targets next year along with the 2015 targets – also late as of Nov. 30.

Platts reports that McCabe couldn’t tell lawmakers when the 2014 rule would be issued or when proposals for 2015 and 2016 would be forthcoming. It generated bipartisan dyspepsia. Platts details one exchange:

“I can't give you a date certain,” McCabe said. “My goal is to have these done as quickly as we can.”

“That's gibberish,” responded Representative Jackie Speier, Democrat-California. “You've got to have a goal that we can hang our hats on. Maybe Congress should issue a rule to repeal the [RFS]. I don't think we're asking for a lot here.”

“You cannot take that long to promulgate a rule,” added Representative James Lankford, an Oklahoma Republican who chaired the hearing.

Some in Congress clearly have come to the realization that the RFS is dysfunctional, underscored by EPA’s ham-handed efforts to get the annual ethanol requirements out on time. The requirements are needed by obligated parties, like refiners, so that they can comply with the RFS. API President and CEO Jack Gerard:

“It is unacceptable to expect refiners to provide the fuels Americans need with so much regulatory uncertainty. This is an example of government at its worst.”

As if to compound this flawed government central planning that tries to mandate consumer behavior, some continue to assert that pushing increased volumes of higher ethanol-blend fuels into the marketplace – such as E85 and E15 – will remedy another of the RFS’ problems, the ethanol “blend wall.” The blend wall refers to the point where the RFS requires blending more ethanol into the gasoline supply than can be safely used as E10, which is standard across the country.

A recent report by the Fuels Institute highlights some of the problems with E85, which contains up to 85 percent ethanol and can only be used in flex-fuel vehicles (FFVs). The report found that E85 is available at just 2.2 percent of the nation’s filling stations and that FFVs represent only about 6 percent of the country’s registered light-duty vehicles.

Those data points must give pause at the country’s service stations, 94 percent of which owned by independent businesses. The Fuels Institute:

Deciding to offer a new fuel product is not a simple decision. Unlike many other products at a retail location, fuel cannot be offered on a trial basis and then easily transitioned to another product if it does not produce the target revenues envisioned. Rather, retailers must invest capital to ensure their equipment is suitable and ready to accommodate the new fuel. In many cases, the introduction of a new fuel product requires the elimination of another.

That last point is important. Station owners know, as the Fuels Institute report states, that E85 has underperformed both midgrade and premium in terms of gallons sold, selling 38.2 percent and 46.8 percent fewer gallons, respectively. In other words, to sell E85 a number of stations would have to quit selling fuels that have been more profitable. The report:

The combination of margins and volume demonstrate that, over the time period being evaluated, E85 generated an average monthly profit of $789. This is less profitable than either premium ($1,193/month) or midgrade ($1,466/month).

These realities also are reflected in reduced numbers of FFV models being offered by manufacturers to U.S. consumers – especially in the pickup, van and SUV segments – the past few model years. A couple of charts illustrate.

FFV Models offered by OEMs 

Number of FFV by OEM and model yearThe charts above and the to the left, based on the Energy Department/EPA Fuel Economy Guide, show that the number of FFV models available to consumers, compared to all models, peaked with the 2013 model year and is in significant decline. This decline likely will be amplified by the fact that the fuel economy “credit” given to automakers to produce FFVs is being phased out and is scheduled to disappear altogether in 2020.

While model counts don’t reflect actual FFV retail sales – just the reduced model options for consumers – they indicate the way manufacturers assess the future of E85 and FFVs.

The data in these charts suggest that the U.S. public is “voting” on FFVs (and E85) – through  weaker demand, which then plays into decisions by vehicle manufacturers (especially domestic companies) to pull back on commitments they made just a few years ago.

Manufacturers know that consumer demand for FFVs – and, by extension, E85 – isn’t there.

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.