By Robert Campbell
NEW YORK Aug 6 Eight months after the legal
deadline the Obama Administration has released the 2013
Renewable Fuels Standard rule. More importantly it promised
waivers next year that will supposedly keep this badly designed
law from inflating gasoline prices.
Is this a cause for celebration? Hardly anyone will be truly
happy with this decision. The agricultural lobby will be
dismayed by the tacit abandonment of the effort to dump ever
more corn into the nation's fuel mix.
Those merchant oil refiners who do not blend their own fuel
such as Valero or CVR Refining are still on the
hook to buy up as many ethanol blending credits, known as RINs,
as they were before.
The firms that profit from this set up - the traders and
hedge funds that have been speculating on RINs as well as
companies like oil major BP that blend more gasoline than
they import and manufacture - will still be winners from this
flawed system but even they must be wondering if it would be
preferable to have a clear legal regime rather than an endless
series of ad hoc fixes.
So what have the regulators done? They've thrown a bone to
the losers in this trade in the form of an extended compliance
deadline and a reduction of the unworkable advanced biofuels
requirement that will ease the pressure on buyers for 2013.
But say you are a trader at one of the firms short RINs. How
would you trade for 2014? Would you slow purchases in the hope
that the Environmental Protection Agency's 2014 RINs rules are
flexible enough to keep your requirements under control? Or do
you instead keep buying to try and hoard 2013 RINs?
In essence all the EPA has done is admit that the Renewable
Fuel Standard is irretrievably broken without offering a fix.
And to be fair it is outside of the EPA's duties to fix the
Renewable Fuels Standard (RFS) which is, after all, an act of
But the United States is now going through the spectacle of
trying to enforce the functioning of a renewable fuels policy
that it acknowledges is broken.
TIME TO ACT
The problem is, as we all know, extensive. The RFS assumes a
gasoline market that is much bigger than it is in reality and
one that is growing robustly rather than contracting. Nor are
advanced biofuels anywhere near commercial availability. And
finally it offers no solution to the thorny question of
liabilities arising from the sale of fuel blends with more than
10 percent ethanol.
Fixing these issues means substantial changes to the RFS and
the Obama administration seems to have signaled that it is
willing to abandon the push to greater than 10 percent ethanol
blending in conventional gasoline.
The biofuels industry is also unlikely to be very happy with
this ruling. While backers had been ready to throw advanced
biofuels requirements under the bus to preserve market share for
conventional biofuels, such as corn derived ethanol, they were
adamant that the fuels industry should simply be forced to shift
to higher ethanol content fuel blends one way or another.
Now they face an abandonment of the policy of ever-higher
blends of corn ethanol into the fuel mix in the name of keeping
fuel cheap, ironically one of the original arguments for higher
No doubt this summer's saga of spiking RINs prices and the
policy quagmire engendered by the flawed assumptions of the
legislation underpinning the Renewable Fuels Standard will spur
an effort within Congress to reform the system.
Any effort at change will likely trigger a colossal lobbying
effort as the biofuels industry seeks to preserve its market
while the oil firms try to crush the upstart rival. This sort of
political set-to is hardly fertile ground for a sensible energy
What's more likely to happen is either a cobbled-together
compromise that pleases only entrenched interests or no reform
whatsoever that leaves the EPA with no choice but to rely on
waivers to mitigate the damage that would be caused by the RFS.
The real winners in this situation would be lawyers and
lobbyists. No one else can plausibly say that there is a net
benefit for the United States from the endless fighting over
ethanol quotas, blending rules and pathways to compliance.
Yet there is a simple way out of this mess that cuts the
lobbyists out of the equation. A simple requirement reserving a
certain percentage of the fuel mixture for ethanol would
streamline enforcement and compliance and allow for sensible
long-term planning by all sides in the industry.
Fixing the blending requirement at today's levels in volume
terms would ensure a smooth transition to the new regulatory
regime and minimize disruption in both the oil refining and
biofuels production industries.
Unfortunately achieving this sort of solution will require
political leadership both from the Obama Administration as well
as the factions in the U.S. Congress that back various aspects
of the current regulatory regime. Does the will exist to
overcome the poisonous atmosphere in Washington to fix this
error or will a solution to the RFS become the latest victim of
dysfunction in the American capital?