Commodities & Metals

U.S. House Reviewing Renewable Fuels Standard

Biofuel Cans
Source: Thinkstock
By now, anyone paying any attention to gasoline prices has run into the term “blend wall,” which is the point at which mandated ethanol production matches or exceeds ethanol demand. Because gasoline marketers must demonstrate that they have either purchased the appropriate amount of ethanol or renewable fuel credits known as Renewable Identification Numbers (RINs) to equal their sales volume, the tight supply of RINs has driven up their cost and contributed to the relatively high pump price of gasoline.

At hearings this week in the U.S. House of Representatives, the renewable fuels providers and the oil companies will get to argue their cases for continuing or eliminating the Renewable Fuels Standard (RFS). Oil companies hate the RFS and want it to go away; renewable fuels advocates generally support the RFS, at least in theory if not in every detail.

In testimony today, the CEO of the Renewable Fuels Association (RFA) told the committee members:

[T]here is nothing wrong with the RFS that cannot be fixed with what is right with the RFS, and there is NO need to legislate changes to a program that is working well today.

The RFA counts among its members leading biofuels producers like Archer Daniels Midland Co. (NYSE: ADM), The Andersons Inc. (NASDAQ: ANDE) and Pacific Ethanol Inc. (NASDAQ: PEIX). Valero Energy Corp. (NYSE: VLO), Kior Corp. (NASDAQ: KIOR) and privately held POET Inc. are not on the RFA’s membership roster.

The renewable fuels industry argues for flexibility built into the RFS system, and that if oil refiners and marketers would increase production of 85% ethanol fuel (E85), the “blend wall” issues would disappear. Independent energy economist Philip Verleger has made similar arguments.

Valero has said that RINs will cost it $750 million this year and that those costs will have to be passed along to consumers. The American Petroleum Institute has said that the RFS will raise gasoline prices by 30% and cost the U.S. $770 billion in GDP by 2015.

Verleger sums up the issue this way:

A rapid shift to E85 could reduce conventional petroleum-based gasoline demand significantly. Half of US refining capacity might need to be shut should RIN prices remain so high. … In short, no RIN problem exists. Instead the trouble has been created by the stubborn resistance of some refining companies — particularly Valero — to the RFS program.

The oil companies have a powerful voice in Washington, so expecting a quick solution by adding E85-capable pumps at the more than 130,000 U.S. gas stations is a long ways off. At the same time, the U.S. Supreme Court recently declined to review an oil industry appeal of a ruling that upheld the U.S. EPA’s authority to set renewable fuel goals.

The House hearing very likely will not settle anything, but it is more than just political theatre. The price of ethanol and the price of gasoline hit every U.S. citizen right in the pocketbook — right next to where they carry their votes.