Energy Townhall: MURPHY: Ethanol Proponents Mislead on Gas Prices

April 23, 2013

Robert Murphy, April 22- In their recent op-ed on the ethanol mandate and gas prices, Tom Buis and Bob Dinneen greatly misled Politico’s readers with both contradictory claims and withholding crucial facts. Both the government’s own analysis and common sense tell us ethanol mandates are costly. The way to bring down gas prices is less government interference, not more.

The reader doesn’t need a PhD in economics to see the smoke and mirrors in the Buis and Dinneen piece. Early on, they claim that Renewable Identification Number (RIN) credits for ethanol are “free,” and that they were “created at the oil companies’ insistence.” Then in the very next sentence they say that early this year “the price of RINs rose dramatically,” and later in their op-ed state that petroleum industry trade groups are spending “millions of dollars” to attack the renewable fuel mandates.

Now regardless of what the reader may think about oil companies, the above claims make no sense. Here’s what really happened: The federal government has established a Renewable Fuel Standard (RFS) that requires refiners to blend in a minimum amount of ethanol into the nation’s fuel mix. Recognizing that certain refiners are closer geographically to the source of ethanol, the refining industry asked that a credit trading system be implemented. This way, if it were cheaper for Refinery X to blend in additional gallons of ethanol, it could more than meet its quota of the mandate, to take the onus off of Refinery Y, where it would be more expensive. In order to share the pain equitably, Refinery X would sell its surplus RIN credits to Refinery Y. Thus, the nation as a whole would still meet the aggregate ethanol mandate required by the federal government, while minimizing the economic costs of compliance. This is the limited sense in which the oil industry “asked” for the RIN system.

As far as Buis and Dinneen’s claims that RINs are “free,” the simple fact is that RIN credits spiked from 7 cents early in 2013 to over $1 in March. Of course this represents a genuine burden to refiners. The federal mandate is causing individual companies to do things that they otherwise would not choose to do. If it really made economic sense to blend in 13.8 billion gallons of ethanol into the fuel mix this year (what the RFS requires), you wouldn’t need a federal mandate forcing the refiners to act this way.