Ethanol Industry Ad Campaign: Fuels America or Fools America?

As the June 1 deadline approaches for EPA to propose Renewable Fuel Standard (RFS) mandates for 2014, 2015, and 2016, biofuel lobbyists are cranking up their political and PR efforts to sway EPA’s decision. In a television and digital ad campaign launched this week, Fuels America, a coalition of biofuel interests, accuses the “oil industry” of “refusing to fulfill its obligations” under the RFS.

Fuels America also claims EPA must choose either to support “rural economies,” “permanent jobs,” and “the world’s cleanest motor fuels,” or to “reward” the oil industry, which supposedly means “more imported oil from hostile foreign regions, more pollution and spills,” “fewer American jobs,” “protecting the oil monopoly on our fuel supply,” and “even higher gas prices.”

Fools America is a much better description of what these regulatory profiteers are trying to pull off. The RFS does not benefit “rural economies,” it benefits corn farmers at the expense of beef, poultry, and hog farmers. The RFS creates “permanent” jobs only in the sense that it creates special privileges in the form of government-guaranteed market shares for biofuel companies and the corn farmers who supply them. A “monopoly” is a market with a single supplier; a commodity such as a fuel type cannot be a monopoly. Gas prices and oil imports from hostile regions are at their lowest levels in a decade, thanks chiefly to the fracking revolution and U.S. oil companies, not RFS blending requirements.

As for the RFS producing the world’s “cleanest” fuels, the program has significant environmental downsides. It expands aquatic dead zones, accelerates wetlands conversion and habitat loss, may increase smog-forming VOC emissions, and likely increases net greenhouse gas emissions. The RFS program also inflates food and fuel costs and exacerbates world hunger, contributing to political instability and violence in developing countries.

Let’s delve a bit deeper into the controversy over the 2014-2016 ethanol mandates and Fools America’s campaign to influence EPA’s rulemaking.

Statutory and Regulatory Context

The 2007 Energy Independence and Security Act (EISA) established the RFS program in its current form. EISA mandates that refiners increase the amount of biofuel sold in the nation’s motor fuel supply from 4 billion gallons in 2006 to 36 billion gallons in 2022. However, EISA also authorizes EPA to adjust the annual targets “if there is an inadequate domestic supply,” broadly defined by the agency to include all infrastructure, market, and legal constraints that could result in an inadequate supply of renewable fuel to the ultimate consumers.

In Nov. 2013, EPA concluded that the 2014 RFS mandate would exceed the “blend wall” — the maximum quantity of ethanol that can be sold in a given year. The blend wall is a product of two factors. First, the practical constraints on how much ethanol can be blended into each gallon of motor fuel. EPA recognized that warranty and liability concerns, lack of compatible fueling infrastructure, and, most importantly, anemic consumer demand effectively limit the standard blend to E10 — motor fuel blended with up to 10% ethanol.

The second factor determining the blend wall is the overall size of the motor fuel market. As the American Petroleum Institute (API) and American Fuel & Petrochemical Manufacturers (AFPM) explain in a recent letter to EPA Administrator Gina McCarthy, when Congress enacted EISA in 2007, the Energy Information Administration (EIA) forecast that demand “would continue to increase to 156 billion gallons in 2015 and 172 billion gallons in 2022.” That meant E10 would suffice to meet statutory targets, at least for 2014 and 2015. But in EIA’s most recent forecast, gasoline demand is 11% lower for 2015 and 26% lower for 2022 than in the 2007 projection.

Based on the arithmetic of the blend wall, EPA in Nov. 2013 proposed to trim the overall 2014 statutory target from 18.15 billion gallons to 15.21 billion gallons — a 16% cut. That sparked a firestorm of protest from biofuel interests, and EPA — now 17 months behind its statutory deadline for finalizing the 2014 RFS targets — has been dithering ever since.

EPA Cannot Regulate Away the Blend Wall

In effect, Fuels America dares EPA to prove it is not a lackey of Big Oil by forcing refiners to crash through the blend wall. But how exactly would EPA do that?

EPA approved the sale of E15 in October 2010. If E15 were now the standard blend, refiners could sell 50% more ethanol than the E10 blend wall allows, which means they could easily meet the statutory RFS targets for 2014-2016. But factors beyond both refiners’ control and EPA’s jurisdiction severely limit market penetration of E15.

First, E15 is incompatible with most vehicles on the road and using it can void the warranties of many vehicles older than Model Year 2013.

Second, to handle E15 and higher blends, service stations must install new (or at least modify existing) blender pumps and storage tanks. Installing new equipment would be a significant expense for most stations, which are small businesses operating on thin profit margins. According to the National Association of Convenience Stores (NACS):

The cost of a new fuel dispenser is approximately $20,000. An average store has four dispensers, so the cost could be as much as $80,000 to upgrade the dispensers alone. If underground equipment is also replaced, permitting and other related costs would increase expenses significantly.

Third, there is virtually no consumer demand for E15, and for good reason. Although ethanol has a market value as an octane-boosting fuel additive, its value as a motor fuel is far more limited. That’s because ethanol contains about two-thirds the energy of an equivalent amount of gasoline. The higher the blend, the worse mileage your car gets, and the more you have to spend to drive a given distance. For example, according to FuelEconomy.Gov, the typical owner of a 2014 Chrysler Town and Country flex-fuel vehicle would spend an extra $1,450.00 annually to operate the vehicle on E85 instead of regular gasoline.

Biofueling Demagoguery

Fuels America would have us believe the blend wall is a contrivance of oil industry skullduggery. Renewable Fuels Association (RFA) CEO Bob Dinneen claims the blend wall exists only because the oil industry has “steadfastly refused” to invest in blender pumps, storage tanks, and other infrastructure compatible with E15-and-higher ethanol blends. Weirdly unexplained is why it’s not the biofuel industry’s responsibility to pay for the infrastructure on which its success supposedly depends. The RFS compels refiners to buy biofuel, add value to it, and sell it to retail outlets. Isn’t that enough?

The RFA also accuses Big Oil of using supply contracts and franchising agreements to keep E15 and E85 out of retail outlets. Allegedly, this occurs when refiners negotiate contracts with retailers requiring the latter to purchase regular and premium gasoline or all three grades including midgrade. If the station only has pumps and storage tanks for those grades, there are none left over to provide the high ethanol blends consumers supposedly want.

The foregoing allegation, however, merely restates in conspiratorial terms one of the market realities noted above, namely, blender pumps and storage tanks aren’t free. As one industry expert explained to me, more than 95% of gas stations are independent businesses, and more than 50% are unbranded single station operators. Nothing in the typical franchise agreement or supply contract prohibits the sale of higher ethanol blends. Franchisees and other retail outlets just need to make the necessary investment in equipment and infrastructure to sell the higher blends.

Think of it this way. When you take the kids to McDonald’s, you expect the local franchise to carry all the standard items on the McDonald’s menu. That’s the same kind of reliable, predictable service oil companies require their franchisees to offer customers. With this critical difference. Wendy’s and Burger King are not free to sell their food at McDonald’s even if willing to pay for the necessary infrastructure. In contrast, branded service stations are free to offer products in addition to the standard fare if they want to and can raise the requisite capital.

The question Fools America fails to address is this: If latent consumer demand for E15, E30, and E85 is as big as they say, why don’t they invest in the retail infrastructure to provide it?

Refiners’ Obligation?

Fools America claims it’s the refiners’ “obligation” to provide the infrastructure requisite to meeting the RFS statutory blending targets. Oh really! Where exactly in EISA is the supposed obligation discussed or mentioned?

Biofuel interests have never cited any such provision because it does not exist. Apparently, they want us to believe that if Congress willed the end, it must also have willed the means. But sausage making (legislation) is generally not an exercise in abstract logic. Laws embody tradeoffs and compromises and don’t usually give the affected interests everything they want.

In its deliberations on EISA, Congress considered several legislative proposals directing the Secretary of Energy to require major oil companies to install E85-capable equipment at their affiliated service stations. Those bills included the Biofuels Security Act of 2007 (H.R. 559, S. 23), National Fuels Initiative Act of 2007 (S. 162), SAFE Energy Act of 2007 (S. 875), and Global Warming Reduction Act of 2006 (S. 4039). None of those provisions made it into EISA as passed by Congress and signed by President G. W. Bush.

Congress similarly considered so-called Open Fuel Standard bills requiring automakers to produce annually-increasing percentages of E85-compatible, flex-fuel vehicles. Those provisions too were left on the cutting room floor.

The foregoing legislative history should put an end to Fools America’s silly blather about the oil industry shirking its “obligation.” As the Supreme Court reminds us: “Few principles of statutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language,” INS v. Cardozo-Fonseca, 480 U.S. 421, 442-43 (1983).