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April 1, 2015

The RFS Fallacy

April 1, 2015
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The Renewable Fuels Standard in the Energy Independence and Security Act of 2007 sets mandates for biofuels production in the United States and was intended to reduce our dependence on foreign oil and reduce our greenhouse gas emissions. While both these goals have been achieved since the passage of that law, neither was due to the Renewable Fuels Standard (RFS). Rather, the U.S. oil industry has almost doubled the nation’s production of oil, making oil imports fall appreciably; and a recession beginning in 2008 with a sluggish economy thereafter, combined with a natural gas production boom enlarging its market share versus coal for electrical generation resulted in a lowering of greenhouse gas emissions. Despite not meeting its goals, the RFS is costing American motorists additional fuel costs over and above what they would have paid for gasoline due mainly to ethanol’s lower fuel efficiency. And, according to the Congressional Budget Office, American motorists can expect further cost increases if the original RFS mandates are forced to be met.

The Energy Independence and Security Act (EISA)

EISA requires that by 2022, 36 billion gallons of biofuels will be produced with 21 billion gallons being advanced biofuels and 16 billion gallons of that being cellulosic biofuels, capping corn-based ethanol at 15 billion gallons. EISA required production of cellulosic biofuels to start in 2010, but the first commercial plants were not in existence until 2013, and even then, they could not meet the volumes required by EISA. Cellulosic production is complex, has logistical challenges, and is expensive, which is why cellulosic biofuels did not enter the market of their own accord and had to be mandated by Congress.

The Blend Wall

The blend wall is reached when more than 10 percent of ethanol must be blended into gasoline to reach the mandates in EISA. Above the 10 percent level, automobile manufacturers will not warranty their vehicles; and smaller engines in boats and lawn mowers are already having problems with a 10 percent ethanol level, requiring additives to deal with the corrosive properties of ethanol. Further exacerbating the problem is that motor gasoline demand has not risen over the past 5 or 6 years due to increasing corporate average fuel economy mandates from the Obama Administration, the worst economic recovery since the Great Depression and high oil prices that have only abated since June of last year.

Additional Cost to Motorists

Because the energy content of ethanol is less than gasoline, vehicles running on E10 (10 percent ethanol and 90 percent gasoline), will generally get 3 percent to 4 percent fewer miles per gallon than they would if they were running on pure gasoline. That mileage penalty is essentially an additional cost that the motorist must pay at the pump in additional fuel purchases. To figure the cost, the difference in the cost of ethanol and the cost of unblended gasoline need to be compared.

The monthly and annual wholesale, or “rack,” prices for ethanol and gasoline at fuel depots in Omaha, for example, can be compared. In December 2014, the rack price of a gallon of ethanol was $2.40, while a gallon of unleaded gasoline was $1.73. Because ethanol is less fuel efficient than gasoline, about 1.5 gallons of ethanol is needed to match the energy contained in a gallon of gasoline. That means it costs about $3.60 a gallon to get the same amount of energy from ethanol as from a gallon of gasoline, making ethanol about twice as expensive as gasoline in that month.[i] Historically, since 1982, the price of an energy-equivalent amount of ethanol has, on average, been about 2.4 times the price of gasoline, but the gap has narrowed in recent years due mainly to the increase in oil prices between 2008 and 2014.[ii]

The same energy-equivalent prices can be used to estimate the annual cost of using ethanol. Between 2007 and 2014, about 92.5 billion gallons of ethanol were blended into domestic gasoline supplies. Over that eight-year period, the energy-equivalent cost of ethanol averaged about 90 cents per gallon more than gasoline.[iii] Americans have therefore paid about $83 billion (about $10 billion annually) for ethanol in gasoline. Since the United States has about 212 million licensed drivers, ethanol in gasoline costs the average driver about $47 per year.

It is important to note that refiners would be using some amount of ethanol as an oxygenate and octane booster even if the RFS had never existed. Oxygenates provide a number of benefits that include providing for more complete fuel combustion, extending the life of a barrel of oil, and reducing tail pipe emissions.

Congressional Budget Office Study

The Congressional Budget Office (CBO) conducted a study of the RFS and evaluated three alternative scenarios: 1) a scenario that requires compliance with total renewable fuel and advanced-fuel mandates and the corn-ethanol cap as stated in EISA; 2) a scenario that holds volume requirements at levels proposed for 2014; and 3) a scenario that repeals the law and as such has no volume requirements. The study evaluated the impacts of these 3 scenarios on ethanol production and motor fuel prices in 2017. It found that ethanol production in 2017 is likely to be the same at 13 billion gallons if mandates are held at 2014 levels or if the RFS is repealed because of the octane and carbon monoxide advantages of using ethanol and because ethanol is cheaper than gasoline if fuel-equivalency is not taken into account.[iv]

However, if the RFS levels of EISA are required to be met, in 2017, the price of gasoline blended with 10 percent ethanol would increase by $0.13 to $0.26 per gallon (4 percent to 9 percent); the price of petroleum-based diesel would increase by $0.30 to $0.51 per gallon (9 percent to 14 percent); and the price of E85 (a blend of 85 percent ethanol used in flex fuel vehicles) would decrease by $0.91 to $1.27 (37 to 51 percent).

The study found that meeting EISA mandates will be challenging because cellulosic production capacity is likely to remain well below mandated levels; using other advanced fuels for cellulosic biofuels would mean large and rapid increases in their supply, which would be a difficult undertaking; and overcoming the blend wall will require capital investments in fueling stations and significant subsidies to encourage the use of E85. The study also found that the reductions in 2017 emissions under the EISA mandated volumes would be small due to the limited use of cellulosic biofuels and the continued use of corn ethanol from grandfathered facilities–those in operation or under construction by the end of 2007.

Conclusion

The problems that the RFS was designed to solve — America’s dependence on foreign oil and an increasing trend in greenhouse gas emissions —are being taken care of mostly by the nation’s oil and gas industry and a sluggish economy. When Congress first created the RFS in 2005, domestic oil and natural gas liquids production accounted for just 35 percent of total U.S. petroleum consumption. But, they now account for more than three-quarters of total U.S. petroleum consumption — nearly double the level at the time of the RFS’ 2005 creation.[v] As a consequence, America’s dependence on foreign oil has been reduced by nearly two-thirds due to the nation’s oil and gas industry’s ingenuity and use of hydraulic fracturing and directional drilling.

Further, the CBO study has found that greenhouse gas emissions will not be lower in the short term due to the RFS. However, carbon dioxide emissions have been reduced by 10 percent since 2007 when the EISA was enacted due to lower demand for energy because of the recession and sluggish economy and because of the natural gas boom that substituted gas for coal in the generation sector.[vi] Here again America’s oil and gas industry created a boom in natural gas production, lowering natural gas prices and making it more economic for electricity generation than coal, which is more carbon intensive than gas.

Clearly, the RFS is not doing what the Congress originally intended. According to the CBO, if the RFS was repealed or if its future mandates were kept at 2014 levels, corn-based ethanol would remain at 13 billion gallons, but American motorists would be free from incurring even higher gasoline prices due to the RFS.


[i] U.S. Department of Agriculture, Table 14 Fuel ethanol, corn and gasoline prices, by month, http://www.ers.usda.gov/data-products/us-bioenergy-statistics.aspx

[ii] New York Times, End the Ethanol Rip-Off, March 10, 2015, http://www.nytimes.com/2015/03/10/opinion/end-the-ethanol-rip-off.html?smid=tw-share&_r=3

[iii] US Department of Agriculture, Table 15 Fuel Ethanol Corn and Gasoline Prices Marketing Year, http://www.ers.usda.gov/data-products/us-bioenergy-statistics.aspx

[iv] Congressional Budget Office, Issues Regarding the Renewable Fuel Standard, March 27, 2015, http://www.cbo.gov/sites/default/files/cbofiles/attachments/50050-RFS_Presentation_MEA.pdf

[v] See Energy Information, Monthly Energy Review, Table 3.1, http://www.eia.gov/totalenergy/data/monthly/index.cfm#petroleum

[vi] See Energy Information Administration, Monthly Energy Review, Table 12.1, http://www.eia.gov/totalenergy/data/monthly/index.cfm#environment


View Comments
  • Susan O’neill

    The IER is so biased against Obama that they have proven to me at least that their main impetus is not driven towards research into fossil fuel reduction or combating change.Instead it devotes it’s considerable resources and energies into denouncing any attempts at tackling global warming, preferring to compare the cost of such a necessary enterprise into one based entirely on base profit and economic considerations. The trouble with this kind of condemnation of any and all alternatives is myopic and self seerving.

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