Council on Foreign Relations: Is the Ethanol Mandate Pumping Up Gas Prices?

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April 3, 2013

Michael Levi, April 1- An esoteric fight of the Renewable Fuels Standard (RFS2), which mandates that the United States use an increasing volume of ethanol each year, has become a bit more prominent in recent weeks, with some accusing the mandate of contributing to rising gasoline prices in new and troubling ways. I remain perplexed as to what exactly is going on – more on that a bit further down – but I do find the defense from the Renewable Fuels Association, published last week in the form of a white paper commissioned from Informa Economics, hugely unpersuasive.

 

The basics of what’s happening are broadly agreed. There is controversy over whether large numbers of U.S. cars can safely use fuel that contains more than 10 percent ethanol. For all practical purposes, then, refiners and blenders don’t want to use more than 10 percent ethanol in the fuel they produce. Meanwhile, the RFS2 is mandating increasing use of ethanol – and, because of high gasoline prices and improving fuel economy, total U.S. fuel consumption is falling at the same time. This squeeze from both sides means that the United States has hit the “blend wall” – the point at which it can’t use any more ethanol without breaching the 10 percent threshold – far earlier than anyone expected. It is impossible to comply with the volume requirements of RFS2 and avoid the blend wall at the same time.

For the time being, though, there’s a way out. In years when ethanol producers make more ethanol than the mandate requires, they generate a surplus of something called Renewable Identification Numbers, or RINs. They can bank those for the next year. Before 2012, when ethanol subsidies stopped, producers built up a surplus of RINs; part of that surplus remains. Blenders and refiners can buy these RINs instead of actually blending ethanol into their fuel. That’s how they’re dealing with the current crunch: they’re buying RINs instead of blending the full mandated volume of ethanol. The problem is that there’s a limited supply of RINs, so prices for them have skyrocketed. It’s those super-high RIN prices that people are now blaming for higher prices at the pump.

The big question is this: How much are high RIN prices actually inflating fuel prices? And how might that impact evolve? The new industry association paper claims that the impact is tiny, and that, once you factor in the relatively low price of ethanol, RFS2 is still producing net benefits for consumers. But their analysis doesn’t hold up.

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Tags council on foreign relations informa economics blendwall rin fraud subsidies other voices