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University Economists Find RFS Reduces—Not Increases—Consumer Fuel Prices

September 23, 2014


All eyes are (still) on the White House Office of Management and Budget (OMB). Its been exactly one month since the Environmental Protection Agency (EPA) sent its final rule for 2014 RFS Renewable Volume Obligations (RVOs) to the OMB for review. And while the oil industry and its anti-RFS allies continue to push OMB and EPA to gut the program, RFA and other renewable fuel proponents remain hopeful that EPAs final rule abandons the problematic blend wall methodology and low-ball volumes that appeared in the proposal. It has been widely reported that the proposed rules surprising U-turn on RFS implementation was driven by unfounded fears about the potential effects of the program on retail gas prices. Apparently, oil industry lobbyists (along with well-connected investment firms and a particular airline) convinced some in the Administration that higher prices for RIN credits (Renewable Identification Numbers) would somehow translate to higher gas prices at the pump for consumers. And, of course, high gas prices are a political nightmare for any sitting President. Despite the total lack of evidence to support the high-RIN-price-equals-high-gas-price theory (see chart below), it is apparent that some quarters of the Administration continue to buy into the notion. But now a new working paper released by the Center for Agricultural and Rural Development (CARD) at Iowa State University confirms that the near-term statutory RFS requirements would not have any meaningful impact on regular gasoline (E10) prices and would, in fact, lead to much lower prices for high ethanol blends like E85. Along the way, the CARD paper completely debunks a study bought by the American Petroleum Institute (API) and a misguided analysis by the Congressional Budget Office (CBO). According to the CARD paper by Professors Sbastien Pouliot and Bruce Babcock:
  • the effects of increasing ethanol mandates that are physically feasible to meet on the price of E10 are close to zero.
  • Increased mandates can have a large effect on the price of E85 if the mandates are increased to levels that approach consumption capacity.
  • Many in the oil industry have used the specter of higher pump prices to argue against increased mandates. These findings show that concern about the consumer price of fuel do not justify a reduction in feasible ethanol mandates.
Based on the results of an econometric model built specifically to analyze the impacts of various RVO levels on gasoline and E85 prices, the authors found a 2014 RVO at or below 13.67 billion gallons should cause RIN prices to drop to zero. Further, [t]he effect of increasing the ethanol mandate beyond 13.67 billion gallons on the price and quantity of E10 is small. Indeed, the results show just a 1 cent per gallon (0.3%) difference in retail gas prices if the RVO was raised from the proposed level of 13 billion gallons to 14.2 billion gallons (the study did not examine the statutory level of 14.4 billion gallons). Meanwhile, E85 prices drop precipitously as the RVO is increased. For example, increasing the RVO from 13.6 bg to 14.0 causes E85 prices to fall by 55 cents per gallon (18%) to $2.57 per gallonor $1 per gallon less than E10. This occurs because a binding mandate causes the price of RINs to increase to bridge the gap between the value of ethanol to blenders and the cost of producing ethanol. The study also highlights the virtuous cycle that is created by RIN values under a binding RFS; that is, not only do higher RIN values stimulate lower E85 prices and increased E85 usage, but they also stimulate investment in the infrastructure to further expand E85 consumption in the future. The authors write the installation of new E85 pumps would shift out the demand for E85. By pushing the maximum volume of E85 that can be distributed in the United States, the demand for E85 would become more elastic. As such, the installation of new E85 pumps would create conditions more favorable for increased mandates to lower consumer fuel prices. In other words, implementing the statutory RFS requirements leads to expansion of renewable fuel use above and beyond the so-called E10 blend wall and lowers consumer fuel prices. Go figure. Isnt that what the RFS was intended to do in the first place? We hope OMB and EPA pay close attention to the new CARD studyits still not too late to correct the innovation-killing RVO methodology and misjudged volumes that appeared in the disastrous proposed rule.