Biofuel Blending Rules Won’t Raise Gas Prices | Commentary

Posted October 30, 2013 at 2:30pm

Congress and the American people have been told a number of stories about the causes of rising prices for Renewable Identification Numbers — the credits oil refiners and importers use to demonstrate compliance with the renewable-fuel standard.

What’s really behind this year’s rapid rise in the price of RINs? And will their cost be passed to consumers at the pump?

A simple exercise in following the money shows that it’s the refiners’ own failure to adequately plan for compliance that caused the run-up in RIN prices. In spite of that, consumers will actually benefit from competition in the fuel market under the RFS.

Congress has heard a lot of commotion from the oil-refining lobby, who say the RFS is broken. It isn’t. The RIN market is working as Congress intended when it originally passed the RFS, allowing refiners, blenders and importers flexibility in meeting the requirements of the rule.

The truth of the matter is that some refiners have chosen not to blend biofuels and instead try to pay their way out of the RFS obligation. They then cry that they are being “taxed.” But while these refiners look only to comply with the letter of the law, other refiners have a better business model; they have invested in the future by blending high volumes of biofuel and are consequently generating revenue. They and consumers are profiting from their foresight.

A case study illustrates the issue. Monroe Energy purchased the Trainer refinery to produce jet fuel for its parent company Delta Airlines’ operations at nearby Philadelphia International Airport. Monroe then negotiated a multiyear contract with Phillips 66, the former owner of the refinery, to swap gasoline and diesel produced at Trainer for additional supplies of jet fuel at other airport hubs. Now, Monroe Energy — which does not blend biofuels — reports spending $50 million in the first six months of this year to buy RINs. But Phillips 66, which does blend biofuels, reports “improved marketing margins” based on profits from higher RIN values.

This year’s rapid rise in RIN prices began right after the compliance deadline for the 2012 RFS volumes, when various refiners recognized the inequality in their compliance strategies. In fact, University of Missouri researchers wondered as long ago as last December why RIN prices were so low. Members of Pennsylvania’s congressional delegation, who wrote to EPA Administrator Gina McCarthy in July, also correctly noted that RIN price volatility occurred because of uncertainty over the 2013 rule, which was delayed in part by the refining industry’s legal challenges to the 2012 rule. The uncertainty equally affects all participants in the program, renewable-fuel producers included.

The “blend wall” isn’t to blame. The blend wall is nothing more than a trade barrier established by market incumbents to block competition. In some areas of the country, retailers offer biofuel blends above 10 percent at a lower price to consumers. There are many potential ways to use additional volumes of biofuels in U.S. transportation to reduce our reliance on foreign oil and lower fuel prices.

The cost of RINs has not shown up in the price consumers pay at the pump, and it likely never will. While many of the refiners have threatened to pass the cost along, they are prevented by competitive pressure. Other refiners are not making consumers pay, instead absorbing the costs in their bottom lines. Further, the refiners who blend biofuels could pass their profits from RIN trading to consumers — along with the lower cost of the renewable fuels.

It’s possible that Congress never imagined that some refiners would try to block renewable fuels from the market at any cost. Oil tycoon John D. Rockefeller once battled Thomas Edison to try to stop electricity from becoming widely available, because it competed with his kerosene lamp business. Now we see some oil refiners trying to keep renewable fuels out of the market in the same anti-competitive way.

The RFS is not broken. It is a success story that is fostering biotech innovation, with new cellulosic biofuels facilities being built in all regions of the United States. But you would never know this to hear Big Oil tell it.

Some in Congress have begun contemplating legislative changes to the RFS to mollify the refining lobby. But there is no need. The EPA was granted a great deal of flexibility by Congress to administer the RFS program and make adjustments as needed. Further, legislative changes would give Congress only a brief respite from the refiners’ relentless campaign to eliminate this effective program.

But even technical tweaks would unnecessarily bring added uncertainty to the rule-making process, harming all participants in the program and chilling further investment in advanced and cellulosic biofuels, while doing nothing for consumers.

Brent Erickson is executive vice president, Industrial & Environmental Section, of the Biotechnology Industry Organization.