The word “gasoline” no longer characterizes the stuff we put into our cars. Due to regulations forced on the refining industry, “Frankenol” might be more accurate.
This government-engineered, market-distorting fuel is a blend of 90 percent gasoline and 10 percent ethanol (E10). Originally conceived to breathe life into the fledgling U.S. ethanol industry and reduce our dependence on foreign oil, continued tinkering with the Renewable Fuel Standard (RFS) has turned the program into a nightmare.
The RFS requires refiners to blend increasing amounts of ethanol into the nation’s fuel pool annually. Last year they were responsible for blending a minimum of 13.2 billion gallons. This year the figure is higher at 13.8 billion gallons. By 2022, the RFS mandate will require 36 billion gallons.
To document compliance, refiners track the RINs (Renewable Identification Numbers) applied to every gallon of ethanol purchased, or they buy paper RINs which are credits paid to ethanol producers. In either case, refiners have to spend real money to comply with the law.
In creating the RSF program, the government assumed that gasoline demand would continue to rise. It was wrong. With more fuel-efficient vehicles, a lackluster economy, and higher prices at the pump, gasoline demand has declined to the lowest level in 18 years.
As a result, refiners are stuck between the proverbial rock and a hard place: They have had to reduce fuel production because demand is down; yet they have to comply with the increasing ethanol mandate. This means they are buying more ethanol credits in the form of RINs but purchasing fewer gallons of ethanol. As a result, millions of gallons of corn-based ethanol are sitting in storage tanks, while the price of RINs has climbed 20-fold in the last 90 days. Industry analyst Byron King says the RIN credit gimmick has "added a dime, or more, per gallon to the national fuel bill in the first quarter of 2013 – in the face of stagnant or declining oil prices."
But that’s just part of the RFS’s market distorting impact. Ethanol contains less energy than crude oil-based gasoline, so motorists have to fill-up more often and needlessly spend more money. Furthermore, an estimated 42 percent of the nation’s 2012 corn crop will be consumed to make ethanol. Artificially driving up corn prices – particularly when much of the farm belt was drought stricken - has resulted in more expensive meat, poultry, and countless food products leaving consumers to bear the burden.
Research by the Heritage Foundation conducted last year indicated that U.S. ethanol production was responsible for increasing the price of corn by up to 68 percent. Stanford University’s Center for Food Security and the Environment warned, “Poor households in the developing world, where 70-80% of the budget is spent on food, [are] hurt the most.”
And there’s more. Ethanol producers looking to create a larger market for their fuel have convinced the Environmental Protection Agency (EPA) to allow the sale of E15, a fuel blend containing up to 15 percent ethanol. However, as AAA warns, E15 could "void car manufacturers warranties" since 95% of the nation's 240 million light duty vehicles can't handle the concoction. E15 "could result in significant problems such as accelerated engine wear and failure (and) fuel-system damage," according to AAA.
If that’s not bad enough, Son of RFS (RFS2) contains volumetric mandates for other biofuels, including cellulosic ethanol – although no commercial quantities of the advanced fuel are even available. For failing to use this fantasy fuel that can't be found, the EPA fined energy companies $6.8 million. Thankfully, the U.S. Court of Appeals ruled against the EPA and overturned the imposition of the phantom fuel fines.
One would think the judges’ ruling would stop this regulatory insanity. It didn’t. A few days after losing in court, the EPA mandated that 62 percent more cellulosic ethanol be blended into motor fuel in 2013.
However well intended way back when, the RFS is another example of government market intervention that has turned out badly. The RFS is casting a large, menacing and costly shadow over the production and marketing of motor fuels. Rather than making fuels better, it is making them worse. Rather than helping American consumers, it is siphoning money from their pockets.
Frankenol and its ugly Frankenfuel stepchildren should be abandoned on the scrap heap of failed policy prescriptions before they can cause more harm. Congress should repeal the RFS.
Notebook