The Ethanol Gas-Pump Surcharge
A 2007 mandate is needlessly raising U.S. gasoline prices.
March 11, 2013, 6:52 p.m. ET
With gas prices above $4 a gallon in many parts of the U.S., consumers have a right to know why. Crude oil prices have fallen by 1% since the end of February even as gas prices are up 12%, according to an analysis by Reuters. So higher oil prices aren't the answer. Blame this one, at least in part, on Washington and ethanol.
This story dates to 2007 when the Bush Administration joined Democratic greens and corn-state Republicans to pass an energy bill mandating renewable fuel standards. The law required a 10% ethanol blend in all gasoline and established annual mandates for how much ethanol the oil and gas industry must purchase each year through 2022.
This year refiners and importers are required to blend 13.8 billion gallons of ethanol into the nation's gasoline, rising to 14.4 billion next year. The EPA allocates a share of this mandate to oil and gas companies, and to monitor compliance each gallon of ethanol is assigned a 38 digit Renewable Identification Number, or RIN.
The problem is that Washington's seers were wildly wrong about how much gas Americans would keep putting in their tanks. In 2007 annual gasoline consumption was about 140 billion gallons per year, with forecasts of rising demand. But the 2008-09 recession and better fuel economy have lowered consumption to an estimated 135 billion gallons.
Refiners are now crashing into what is called a "blend wall," meaning the feds have forced them to purchase more ethanol than they can safely put in their gasoline. Refiners are reluctant to blend more than 10% ethanol into gasoline because consumers don't want it, and because a higher blend can damage the engines of older cars, boats and electrical equipment.
Refiners must therefore purchase RIN credits from companies that have used more ethanol than required. But the credits are running out, and so the price of RINs has soared to nearly $1 a gallon, up from about seven cents at the start of the year. According to Darrel Good, a University of Illinois agriculture economist, the RIN price "could continue to rise as we approach the higher ethanol mandate for 2014" as credits run out. These costs are mostly passed on to motorists.
Refiners are also getting around the renewable fuels mandate by shipping refined gasoline abroad, because exported gasoline is exempt from the ethanol requirement. So even as domestic gasoline prices have soared, refiners are increasing their exports, and that too has contributed to higher prices.
The fix here is obvious. The EPA has the authority to revise the ethanol requirements, and if it did so tomorrow the price of gas would quickly fall by about five to 10 cents a gallon. If EPA won't act, Congress can and should suspend the ethanol blending mandate to give motorists a break.
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