Lucian Pugliaresi, August 2 – The North American petroleum renaissance is a remarkable achievement that is delivering sustained benefits to the economy from the production of natural gas and crude oil. Rising production from the vast reserves of the Canadian oil sands, North Dakota, and Texas are rapidly improving the outlook for North American oil production. By 2017, combined U.S. and Canadian imports will be less than three million barrels a day of crude oil – half of current levels. But all this good news begs the question: why are gas prices still so high?
It wasn’t too long ago that the U.S. faced a much different future. In 2007, all signs pointed to rapidly rising gasoline consumption, surging oil imports from unstable suppliers, and falling domestic production. Thankfully, those signs turned out to be wrong. Today, Americans are driving less, using less gas, and doing it all in more efficient cars. The downside is that back in 2007, policymakers did not foresee the petroleum renaissance, and responded to the impending doom by imposing mandates requiring the increasing use of renewable fuels – mainly ethanol. The mandate is known as the Renewable Fuel Standard (RFS).
Yet Washington’s short-sighted thinking is now creating substantial problems for both the energy industry and consumers. The fundamental policy challenge stems from a regulatory regime that requires annual increases in volumetric targets in ethanol use, regardless of subsequent higher gas prices or the technical limitations of the U.S. automobile fleet.
That’s where the problems come in. Refiners and other obligated parties like importers must, per the RFS requirements, document that they have blended ethanol into gasoline by acquiring RINs (renewable identification numbers). Producers generate RINs when ethanol is blended into gasoline. In turn, refiners could purchase RINs in exchange for blending ethanol at levels below 10 percent.