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Great Achievements in Central Planning: The Renewable Fuel Standard

Because central planning worked so well in the Soviet Union ...

In 2005, Congress, in its infinite wisdom, imposed the Renewable Fuel Standard on America.  The RFS mandates yearly increases in the amount of ethanol that must be used in motor fuel, on an ever-increasing schedule, through 2022.

Problem is, nobody anticipated a crummy economy, high gasoline prices and shrinking consumption of motor fuel. But the RFS marches on.* As depicted in the video above (from our friends** at smarterfuelfuture.org), the numbers are starting to look wacky and detached from reality.

The renewable fuel standard obligates refiners to add steadily increasing amounts of ethanol and other alternatives into the nation’s transportation fuel supply — up to 36 billion gallons in 2022. But oil industry leaders say they are hitting a “blend wall” where they can no longer mix in enough ethanol to meet the renewable fuel mandate’s volumetric targets without exceeding a 10 percent threshold acceptable for use in all cars and trucks.

The big oil refiners and marketers — BP, Shell, ExxonMobil — are split in their support of the RFS. Each company’s stance reflects its ability to compete in the RFS world. Shell is happy with the RFS, while BP would modify it and XOM would scrap it all together. It all depends on whose ox is being gored.

But San Antonio-based Valero Energy Corp., a pure refiner, finds itself in a squeeze because of the intricacies of the law:

…  while it is the nation’s third-largest ethanol producer, the renewable fuel law blocks [Valero] from holding on to the biofuel credits that are created with each gallon of the product. Instead those tradable biofuel credits, known as RINs, travel with each gallon of ethanol to blenders. Because Valero isn’t blending the majority [of] its own product, it can’t take advantage of those credits, even though the renewable fuel law puts the onus on refiners to comply by securing RINs. As a result, Valero is forced to buy the credits in a market where RIN prices have climbed to over $1 per gallon, up from $0.05 a year ago.

Every time our political class follows its urges to “fix” something in the economy, disruption and dislocation in the markets is sure to follow. Ethanol, especially corn ethanol, has great shortcomings  as a transportation fuel; people use it because they are forced to, not because they want to.

Furthermore, a free-market system would reward the company with the best engineers and the most efficient, lowest-cost refining process. The rewards in a centrally-planned system fall to the companies with the best lawyers and loophole-sniffing accountants. Free markets bring products to market at the optimum price; government-mandated distortions lead to shortages and higher consumer prices.

This week, RFS action heats up on Capitol Hill:

… [T]he House Energy and Commerce Subcommittee on Energy and Power will hold hearings July 23-24 on “An Overview of the Renewable Fuel Standard: Stakeholder’s Perspectives.” …

In the Senate, a bipartisan group of senators introduced a bill in June—the Renewable Fuel Standard Repeal Act (S. 1195)—that would repeal the renewable fuel standard in its entirety.

In the House, the RFS Reform Act of 2013 would eliminate the corn ethanol blending requirement and cap the amount of ethanol allowed in gasoline at 10 percent.

Certainly the RFS needs to be seriously reformed, or preferably, scrapped altogether. Personally, I’d favor moving the first Presidential caucus from Iowa to Texas to blunt the distorting impact of corn ethanol on our energy economy.

* The RFS also created penalties for not using a fuel which does not exist — how awesome is that?!

** I always check the “About Us” page of organizations like smarterfuelfuture.org to see which industry groups are trying to influence our opinions. Sure, you’ve got representation of industrial associations (the American Fuel and Petrochemical Manufacturers, the International Association of Snowmobile Manufacturers, the American Motorcycle Association), but most of the membership is made up of food trade groups: the National Council of Chain Restaurants, the American Frozen Food Institute and a host of state-level poultry and dairy trade associations. That should tell you something about how far-reaching the RFS is, and where the resulting increase in prices is likely to hit your personal budget.

Cross-posted.

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