Time to Rethink Renewable Fuel Rules
Abundance.What was an unthinkable term to describe the North American energy landscape just six years ago now defines it, thanks to the resurgence of large-scale, and sustained, increases in energy production across the United States. Such production growth has driven down crude imports to their lowest levels since 1997, thus lessening the nation's dependence on foreign oil from places like Nigeria and Saudi Arabia. North America now produces two million more barrels per day of crude oil than it did just three years ago.
These new crude supplies — combined with domestic access to plentiful, low-cost natural gas — provide a unique opportunity for U.S. refiners and petrochemical manufacturers to both supply domestic markets and compete in global energy markets. Not only are we well-positioned to produce more energy at home,but also to generate greater economic growth across a wide range of industries,while providing much needed relief to consumers at the pump.
(Read More: Texas Disaster May Help Fertilizer Companies: Citi)
But if we are to fully realize these benefits, we must revisit a long list of regulatory roadblocks installed in an era of rising imports and worries of long-term dependence on foreign oil. One program in need of urgent reform is the Renewable Fuel Standard (RFS) — a set of federal mandates implemented in 2007 that require the blending of ever-larger volumes of biofuels into the gasoline pool. This ill-advised program is putting consumer vehicles at risk,and now threatening to drive up the price of gasoline.
As refiners blend more ethanol into gasoline seeking to comply with RFS mandates,infrastructure constraints and a lack of consumer demand put the policy at odds with reality and have pushed the gasoline pool to a breaking point known as the"blend wall."
Regardless,the Environmental Protection Agency is refusing to readdress or ease the mandates, and recently approved E15 (fuel containing 15 percent ethanol by volume) for use in a large portion of the U.S. automobile fleet. That's even though neither the driving public nor the U.S. auto industry is prepared to use E15 in large volumes. Due to potential engine damage, the use of E15 is strictly forbidden in heavy duty vehicles or cars made before 2000, and U.S auto makers have gone on record that using E15 will violate auto warranties for a range of newer car models.
E85— a fuel option being touted by the EPA that contains between 60 and 85 percent ethanol — is equally riddled with restriction and drawbacks. This fuel can only be used in "flex fuel vehicles" (FFVs) — a type of vehicle most Americans don't own. Even consumers who own FFVs have been resistant to E85 because of its high cost when adjusted for its lower energy content, limited availability and higher frequency of refill. If using E85, consumers will be shelling out more for gas and making frequent trips to the gas station. Additionally, the lack of E85 distribution infrastructure is so dire that it cannot currently be distributed effectively in most regional markets.
As fuel refiners and importers seek to comply with this unrealistic policy, the unintended consequences are becoming clear. RFS could soon result in less gasoline production, which would lower a refiner's or importer's renewable fuel obligation and facilitate the continued production of fuel with less than 10 percent ethanol. Alternatively, refiners could divert some production to foreign markets that do not require, or even want, gasoline blended with ethanol. Greater foreign sales have the added benefit of pushing off the date when obligated parties must blend ethanol at levels above 10 percent, a costly and unworkable option. If neither avenue to compliance is viable, refiners will be forced pay a large fine for not meeting the mandated blending volume.
(Read More: Oil Slide Could Continue as Demand Picture Weakens)
It is becoming increasingly clear that the RFS mandate will likely reduce gasoline supplies to the domestic market at the very time U.S. crude oil production is on the rise. With this abundant supply, American refiners and importers could be producing plentiful, affordable gasoline that meets standards set by strict environmental policies. Instead, refiners are forced to produce gasoline most consumers can't use, if they can produce at all. If the RFS mandate is not reformed, get ready for a rough ride and much higher gasoline prices.
Lucian Pugliaresi has been president of Energy Policy Research Foundation (EPRINC) since February 2007. He has also served in a wide range of government posts, including the National Security Council at the White House, Departments of State, Energy, and Interior, as well as the EPA.