Hitting the Wall on the RFS

Mark Green
Posted March 25, 2016

To understand why the Renewable Fuel Standard (RFS) must be repealed or significantly reformed, start at the “blend wall.”

The ethanol blend wall is where – because of the RFS’ mandates – more ethanol must be blended into the nation’s fuel supply than can be absorbed as E10 gasoline – gasoline containing up to 10 percent ethanol, which is standard across the country. Put another way, when ethanol makes up more than 10 percent of the total U.S. fuel mix, you’ve breached the blend wall.

At that point refiners have few options. They can produce E15 and E85, fuels containing higher volumes of ethanol, or they can comply with the RFS by reducing the amount of fuel supplied to the domestic market. Neither is a good choice for American consumers.

The safe path, the policy that protects consumers, is that the annual ethanol volume requirement be set at no more than 9.7 percent of gasoline demand – to avoid crashing through the blend wall and to protect strong consumer demand for ethanol-free fuel used by owners of boats, outdoor equipment and other devices.

Two trends drive the U.S. toward a blend wall collision: rising ethanol mandates set by Congress when it expanded the RFS in 2007 (known as RFS2) and recent years of falling motor gasoline consumption. Demand first. In the chart below a reality gap appears between the U.S. Energy Information Administration’s 2007 projection for gasoline demand (blue line) – the year RFS2 was enacted – and the demand projections in EIA’s 2015 Annual Energy Outlook (red line) and its February 2016 Short-Term Energy Outlook (green line):

In the reality of this widening gulf, RFS mandates for ever-increasing ethanol use mean that all those gallons of ethanol must be blended into a shrinking number of gallons of gasoline. In fact, that’s what EPA has done. A study by NERA Economic Consulting projects dire economic consequences if EPA implements the statutory volumes:

[O]bligated parties will not be able to meet market demand for transportation fuel and still remain in compliance with the RFS2. Therefore, after exhausting all other available options for compliance, individual obligated parties, each acting independently, could be forced to reduce their … obligation by decreasing the volume of transportation fuel supplied to the domestic market – either by reducing production or exporting. As domestic fuel supplies decrease, large increases in transportation fuel costs would ripple through the economy imposing significant costs on society.

Some – mostly ethanol producers – say the solution is for refiners to produce more higher-ethanol content gasoline, E15 and E85. But this, again, doesn’t protect consumers. Most vehicles on U.S. roads today weren’t designed to use E15 fuel:

Using E15 in vehicles not designed for it could risk damage to engines and fuel systems. Similarly, E15 poses a potential risk to outdoor equipment, boats and motorcycles.

Meanwhile, E85 has a number of limitations. Only flex-fuel vehicles can use it, about a half-dozen of 100 cars on the road today, and only about 2,500 retail stations out of more than 150,000 across the country offer it. The trend is declining sales:

This reflects decisions in the marketplace by consumers, many of whom have learned that because ethanol is lower in energy content, a tank of E85 gas won’t get you as far as a tank of E10. Wishing and hoping E85 is the magical answer to the ethanol blend wall problem simply ignores what consumers are saying with their fueling choices.

For all of these reasons, the path that protects the economy, protects vehicles and equipment and above all else, the one that protects American consumers, is to repeal or significantly overhaul the RFS. Frank Macchiarola, API group director of downstream and industry operations:

“We continue to seek the repeal of or significant reforms to the RFS. Since the inception of the ethanol mandate a decade ago, the United States has undergone an energy transformation from a nation of energy dependence and scarcity to one of energy security and abundance. It is well past time to reform outdated energy policies to reflect the energy realities of today and tomorrow.”