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Answering Crocodile Tears

May 1, 2012

           

In testimony before the Joint Economic Committee on April 26th, 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. Mr. O'Malley went as far as to say, "The reason for the closure of the refineries in Pennsylvania is that they didn't make money, and the reason they didn't make money is that you took away their market.  You delivered the market to the farm industry." Beyond not passing the sniff test (no rationale adult believes that oil's dominance over the nation's transportation fuels is in immediate jeopardy), Mr. O'Malley's comments are more reflective of the petroleum industry's crusade against renewable fuels and a willingness to play fast and loose with the facts. 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 well-documented 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] 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. 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 at the hearing described as a "highly competitive" and "low-profit margin" industry. 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. 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 ago. 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. Perhaps most troubling is that the Committee allowed Mr. O'Malley to turn the hearing into a witch hunt against ethanol and, in so doing, lost focus on the more pressing and substantive issue:  sustained high gasoline prices.  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.[2] As former New York Senator Daniel Patrick Moynihan used to say, "Everyone is entitled to his own opinion, but not his own facts."
[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] 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