Reuters: Column: Well intentioned but flawed, U.S. biofuel policy in need of change

July 29, 2013

Jason Bordoff and Robert McNally, July 26 – Gasoline prices have shot up nearly 20 cents since the start of July and are projected to rise higher yet. Gasoline prices are largely driven by global crude oil prices and usually rise during the summer driving season. But this year, in an ironic twist, they are being pushed up even more in part because US gasoline consumption is much lower than anyone anticipated just a few years ago.

Here's why: In 2007, in a laudable effort to reduce oil imports, Congress revised the Renewable Fuel Standard, or RFS, which mandated that refiners blend increasing volumes of ethanol into gasoline each year. For the most part, refiners cannot blend more than 10 percent ethanol into gasoline. Combine a rising and rigid volumetric ethanol mandate with declining gasoline use, and the result is that this year refiners hit that 10 percent “blend wall.” This year, refiners and importers can comply by buying RINs generated in past years. But that option won't be available after this year, and the problem will get worse in coming years as the ethanol mandate keeps rising but gasoline consumption does not.

Hitting the blend wall means consumers pay more at the pump. To comply with the RFS, gasoline producers (such as refiners and importers) buy credits—known as Renewable Identification Numbers (RINs)—from blenders of ethanol into the gasoline supply.

As the blend wall approaches, the price of RINs has skyrocketed from a few cents at the start of the year to around $1.40 per gallon of ethanol in mid-July. RIN prices then declined sharply this week, to around $1.00, on hopes that the Obama Administration and Congress may be preparing to address the blend wall problem by easing the RFS.