Dear Chairman Casey and Vice Chairman Brady:

I am writing to respond to several outrageous and misleading assertions about ethanol’s role in recent oil refinery closures that were made during the Joint Economic Committee’s April 26 hearing on gas prices in the Northeast. While the testimony of Mr. Thomas O’Malley, chairman of PBF Energy, attempted to tar and feather ethanol and the Renewable Fuel Standard (RFS) as the root cause of refinery closures in the Northeast, any reasonable and honest analysis of the situation reveals that a host of economic factors completely unrelated to the RFS led to the shuttering of the refineries. A fair examination of the factors affecting gas prices in the Northeast not only would have shown that ethanol and the RFS have nothing to do with the recent refinery closures, but it also would have revealed that ethanol is actually helping to reduce prices at the pump for drivers in the region. The economic difficulties facing East Coast refineries boil down to two simple and welldocumented factors. First, most East Coast refineries cannot process the lower-cost types of crude oil that are increasing in supply in North America. As a result, oil acquisition costs for East Coast refineries are substantially higher than for refineries in other regions. Second, due to record high crude oil prices in recent years, demand for gasoline and other finished refinery products has fallen precipitously. Consumers have responded to record high oil and gasoline prices by driving less and purchasing more fuel efficient vehicles. Lower demand for refined products has led to significant refinery overcapacity in the East Coast region. As reported recently by CNN Money, refineries in the Northeast “…are losing money because they are old and cannot process the cheaper, heavier types of oil that are increasingly in supply from Canada’s oil sands, Saudi Arabia, Venezuela and elsewhere.”1 East Coast refineries are designed to process lighter, sweeter crude oil from places like the OPEC nations of Nigeria, Angola, Algeria, as well as the North Sea. Prices for these oil imports are typically based on the Brent crude oil benchmark, while prices for oil processed by refineries in other U.S. regions are based primarily on the West Texas Intermediate (WTI) crude oil benchmark. According to the Energy Information Administration (EIA) Brent crude prices 1 Hargreaves, Steve. “Refinery closures risk Northeast gas price spike.” CNN Money. April 10, 2012. http://money.cnn.com/2012/04/10/news/economy/refineries-gas-prices/index.htm 2 were, on average, $16 per barrel higher than WTI crude oil in 2011.2 Notably, over the past several years some 98 percent of the oil refined in the East Coast region is imported from foreign countries, most of whom set their prices based on Brent crude. While the East Coast refining sector is still heavily dependent on high-priced oil imports from OPEC nations and North Sea countries, other regions, like the Midwest now source nearly all of their oil domestically or from our North American neighbors. Additional data from EIA show that since January 2011, East Coast refiners have paid an average of $18 per barrel more for oil than their competitors in the Midwest and $7 per barrel more than refineries located on the West Coast and along the Gulf of Mexico (see Figure 1 attached). While paying sharply higher prices than their competitors for crude oil, East Coast refineries are selling refined products for generally the same prices as refiners in other regions. Without question, the significantly higher oil acquisition costs for East Coast refineries makes it very difficult for them to succeed in what the American Petroleum Institute witness described as a “highly competitive” and “low-profit margin” industry. Indeed, EIA recently concluded that “poor economics” related to high oil acquisition costs was to blame for the idling of the two East Coast refineries.3 Further, it is telling that the owners of the shuttered refineries themselves — Sunoco and ConocoPhillips — didn’t mention ethanol or the RFS as precipitating causes of their economic difficulties when they announced the closures. Additionally, U.S. consumer demand for refined products has dropped dramatically in response to rapidly escalating oil prices in recent years. In 2011, U.S. consumption of finished petroleum products dropped to its lowest level since 1997, as prices for Brent crude oil and most refined products hit new record highs. Reduced demand for refined products has been particularly severe in the East Coast region, falling 13.5 percent since 2007 alone (Figure 2). The effect of demand destruction on East Coast refiners was recently summed up well by a spokesman for Valero, who told the Houston Chronicle, “[t]hey found it very difficult to compete” and “…if there was demand for product there, those refineries wouldn’t close down.”4 In turn, lower demand for refined products on the East Coast has led to significant excess capacity in the region, which inevitably squeezes profit margins. EIA reports that capacity utilization in the East Coast region fell from 93 percent in 2005 to 68 percent in 2011. By comparison, 2011 capacity utilization rates were a healthy 91 percent in the Midwest and 89 percent in the Gulf Coast region.5 In his testimony to the Committee, Mr. O’Malley suggested that increased ethanol use has been a leading cause of the recent financial difficulties faced by East Coast refineries. However, what Mr. O’Malley failed to mention is that ethanol has been blended with gasoline in the Northeast region at the 10 percent level for many years. In fact, refiners and blenders in the East Coast region are actually using slightly less ethanol today than they were two years 2 EIA. “Refinery utilization rates react to economics in 2011.” March 20, 2012 http://205.254.135.7/todayinenergy/detail.cfm?id=5470 3 Ibid. 4 Sebastian, Simone. “Gulf Coast working to fill a fuel void in Northeast.” Houston Chronicle. Jan. 8, 2012. http://www.chron.com/business/article/Gulf-Coast-refineries-to-fill-void-in-Northeast-2447395.php 5 EIA. “Refinery utilization rates react to economics in 2011.” March 20, 2012. http://205.254.135.7/todayinenergy/detail.cfm?id=5470 3 ago (Figure 3). Moreover, the RFS is a national program and ethanol is blended with gasoline from border to border and coast to coast. If the RFS were truly the cause of refinery difficulties in the Northeast, as Mr. O’Malley contends, it would stand to reason that refineries in other regions — who must also comply with the requirements of the RFS — would be facing similar financial challenges. On the contrary, refinery capacity utilization rates in other regions are strong and, by all accounts, major refining companies are in good health. It is troubling that a hearing purportedly convened to discuss gas prices in the Northeast offered little, if any, substantive discussion on consumer fuel prices in the region and what options are available to refiners and blenders to keep escalating gas prices in check. Had the Committee focused on the advertised subject of the hearing, members would have quickly learned that the object of Mr. O’Malley’s ire — ethanol — is actually the best tool available today for exerting downward pressure on oil and gasoline prices. Despite Mr. O’Malley’s false assertion that ethanol is “more expensive than the product coming from refineries,” data from the Chicago Mercantile Exchange clearly show that ethanol is selling for $1 per gallon less than gasoline at the wholesale level today (even after the expiration of the ethanol blender’s tax credit on Dec. 31, 2011). Further, a 2011 analysis by economists at the University of Wisconsin and Iowa State University found that ethanol reduced East Coast gasoline prices by $0.58/gallon in 2010 and an average of $0.16/gallon from 2000 to 2010.6 When all the facts are on the table, it becomes readily apparent that factors other than ethanol growth and the RFS were responsible for the recent East Coast refinery closures, and that ethanol is one of the best tools available today to drivers in the Northeast to keep fuel prices in check. It is completely illogical and misleading to suggest that ethanol expansion and the RFS contributed in any way to the shuttering of the refineries. As such, Mr. O’Malley’s testimony should be seen for what it truly is — yet another underhanded and deceiving shot across the bow from the oil industry at America’s farmers and ethanol producers. In the future, I encourage the Committee to invite representatives from the ethanol industry to participate in hearings where the impacts of biofuels and the RFS will be discussed. It is a disservice to the Committee, to the public, and to the men and women of the U.S. biofuels industry to focus only on one side of the debate over the costs and benefits of renewable fuels. We look forward to engaging with the Committee on the important topic of gas prices in the future. Sincerely, Bob Dinneen President & CEO 6 See Du & Hayes. “The Impact of Ethanol Production on US and Regional Gasoline Markets: An Update to May 2009.” Center for Rural and Agricultural Development (CARD). April 2011. http://www.card.iastate.edu/publications/synopsis.aspx?id=1160 4 Source for all data: Energy Information Administration

May 1, 2012
The Honorable Robert P. Casey
The Honorable Kevin P. Brady Chairman
Vice Chairman U.S. Senate
U.S. House of Representatives Joint Economic Committee Joint Economic Committee