The Renewable Fuels Standard: A Piece of “Broken Legislation”…OR Is It?
In the not-too- distant future, the Environmental Protection Agency (EPA) will be finalizing the mandated minimum volumes for the 2018 Renewable Fuel Standard (RFS), and, as such, the American Petroleum Institute (API) has some fundamental concerns. For instance, API lobbyists have already begun solicitating both houses of Congress, arguing that the mandate is “broken” and, therefore, legislators on both sides of the aisle need to come together and either reform it or else repeal it completely. As with any new piece of legislation, however, there are two sides to any issue with overall public opinion affirming or denying its success. And the proposed Renewable Fuels Standard is no different.
Speaking against the RFS, API Group Director, Frank Macchiarola, argued: “The reality [behind the failing RFS proposal] is market forces, technological innovations and investments by the oil and gas industry…all have combined with increased domestic crude oil production to supersede the goals of the ‘broken’ RFS.”
That said, just what is it exactly that Macchiarola is arguing? For starters, in 2007 the Renewable Fuel Standards minimum volumes were born out of an assumption that fuel usage would steadily increase, following a predictable pattern that had been witnessed in preceding years. However, actual usage—not to mention current projected usage—does not mirror the projections used to create the minimum volumes mandated by the RFS and the 2015 United States Information Administration (See graph below).
Initial thought contended that the minimum volume of renewable fuels would grow along with consumer demand for fuel and would, likewise, compensate for a lack of growth in domestic crude oil production. However, as one can deduce from the above graph, consumer demand is actually dropping—in other words, the actual number of gallons of mandated ethanol-blended fuel one year is actually a higher percentage of overall volume just one year later. Moreover, domestic crude oil production is actually up, thus it is not an issue of producers scrambling to come up with additional fuel; in fact, there exists a greater surplus of fuel because of higher production coupled with lower demand. The graph below, in spite of government predictions, confirms a significant increase in domestic crude oil production.
So just where does this leave retailers? On the one hand, people are buying less fuel. And when consumers do, in fact, buy fuel, it is proven that there really is not that high of a demand for higher ethanol blends. Service station dispensers may list E-85 as a less expensive fuel alternative; but when one factors in the fact that he or she may get less bang for their buck with ethanol in the form of reduced gas mileage, the truth is the individual actually ends up paying more for the higher blends. Furthermore, most vehicles on the road cannot handle higher ethanol blends. E-85 aside, the majority of automotive manufacturers have stated that their warranties will not cover damages linked to using higher ethanol blends as their engines simply are not designed to run on it.
This situation creates what has been notoriously dubbed the “blend wall.” To meet the RFS mandate, fuel would have to have higher and higher ethanol content, breaching the 10% level that has been thoroughly tested and is approved by UL, AAA, and the vast majority of automotive manufacturers. In order to keep up with the governmental regulations, fuel producers are forced to put more ethanol in the fuel than the consumer truly desires, not to mention more than the automotive manufacturers have said is safe. It could be argued that service stations simply need to sell more E-85; however, E-85 sales comprise less than one percent of annual gasoline demand. Put more bluntly, consumers just are not clamoring for more ethanol.
So, all this said, just who is the Renewable Fuels Standard benefiting? Obviously, not the automotive manufacturers; not US crude oil production; and certainly not American consumers. Put a different way, NERA Economic Consulting predicts the consequences of leaving this well-intentioned, but ultimately ill-fated, legislation in place will include major fuel supply disruptions, decreased GDP, reduced worker pay, and, not surprisingly, a 30% increase in the cost of gasoline and, far worse, an astronomical 300% rise in the cost of diesel.
The bottom line is, we’re all in the business of keeping our customers happy. We provide the goods and services consumers are looking for and that is just how we make our money. If consumers wanted more ethanol, they would simply buy more ethanol—and gas stations across the company would gladly sell it! The solution is to allow the market to adapt and evolve based on the needs and wants of the buying public. And that will be the ultimate tell-all whether or not the Renewable Fuels Standard is a benefit or a detriment to US consumers.
Looking for more information? Visit: www.filluponfacts.com to read more on the flaws in the RFS mandate and to gain a better understanding of the reality of fuel supply and demand.