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EPA’s Final RVO Rule and the Myth of Falling Gasoline Demand

November 16, 2015


One of the oil industry's favorite talking points in its campaign to repeal the Renewable Fuel Standard (RFS) is the argument that "gasoline demand is falling," and thus refiners have fewer gallons of gasoline in which to blend increasing volumes of ethanol. They claim that the purported drop in gasoline consumption has expedited the arrival of the so-called E10 "blend wall," and that the only solution is to pull the plug on the entire RFS program. Oil and gas champions in Congress have happily adopted this narrative. On Nov. 3, Rep. Barry Loudermilk (R-Ga.) proclaimed at a House hearing that the RFS should be repealed because "demand for gasoline is decreasing." A day later, a letter to EPA from anti-RFS House members (secretly written by a lobbyist for a major oil company) suggested that the Unites States is experiencing "shrinking gasoline demand." Even EPA has perpetuated the notion, with a senior official telling RFA National Ethanol Conference attendees in February that "we have to address declining gasoline demand." But there's one little problem with this weary storyline: it simply isn't true. Gasoline demand has actually been rising steadily since 2012, hitting historically high levels this past summer. In fact, monthly gasoline consumption in August 2015 (a whopping 145.1 billion gallons annualized) was the highest since July 2007 and the seventh highest since EIA began keeping monthly records in 1945. What's more, EIA projects annual gasoline consumption in 2016 will be the highest in nine years. There's a fairly simple explanation for the resurgence in gasoline consumption. In an effort to undercut the recent U.S. oil boom and retain its grip on the world market, OPEC refused last year to cut oil production as global supplies began to swell. As a result, the world market has been flooded with oil and prices have plunged; in turn, this has precipitated a sustained drop in retail gasoline prices. After peaking at $3.69 per gallon in June 2014, national average retail prices for regular grade gasoline had plummeted to just $2.12 per gallon by January 2015. Prices have generally ranged between $2.20 and $2.80 per gallon ever since. As any Econ 101 student will tell you, increased supply typically leads to lower prices, which eventually stimulates increased demand. And as it turns out, there is far more elasticity in the gasoline market than many economists thought. Drivers responded to lower gas prices by increasing consumption more quickly and more vigorously than anticipated. Lower gas prices also change consumer purchasing habits when it comes to automobiles. When gas is $4 per gallon, buyers tend to choose smaller, more fuel-efficient vehicles. But when gas prices fall to $2 per gallon, buyers go for pick-ups and SUVs. Of course, those larger, heavier vehicles are less fuel efficient and consume more gasoline (as a general rule of thumb, pick-ups and SUVs get 1/3 fewer miles per gallon than midsize passenger cars). Data from Motor Intelligence show that sales of pick-ups and SUVs are up 13% from a year ago, while sales of passenger cars are down nearly 2%. The oil industry has also made a habit of bashing EIA for ostensibly "over-projecting" future gasoline demand. But, again, the truth belies the talking point. For the past four years, EIA has been regularly under-projecting gasoline consumption. In its 2013 Annual Energy Outlook, for example, EIA projected that 2015 gasoline consumption would total 130.6 billion gallons. In reality, however, we are on pace to consume 139.7 billion gallons this year, 7% more than EIA predicted just two years ago. The 9 billion gallon difference between EIA's 2013 projection and actual usage is equivalent to adding another state of Florida to our nation's gasoline demand. And in 2014, EIA projected 2016 gasoline consumption would total just 133.7 billion gallons. But since then, EIA has revised that forecast to 140 billion gallons—the highest since 2007. So, how is all of this relevant to the RFS debate? When EPA released its proposed rule for 2014–2016 RFS requirements in May, it used the alleged E10 "blend wall" as the starting point for its assessment of "achievable" levels of ethanol consumption. RFA and many other stakeholders pointed out that the law does not allow EPA to consider the "blend wall" or other supposed distribution constraints when setting the RVOs. Legal maladies aside, EPA's proposal surmised that because of the "blend wall," no more than 13.4 billion gallons of ethanol could be consumed in 2015; thus, that's where the agency set the proposed RVO for this year. However, because actual gasoline consumption has been much higher than anticipated by EPA, the "blend wall" has also shifted higher. EIA data show that refiners and blenders are on pace to blend 13.7–13.8 billion gallons of ethanol with gasoline in 2015, well above the EPA proposed level. EPA's "blend wall" starting point for the proposed 2016 RVO level was also lower than current gasoline demand projections justify. Accordingly, even if EPA continues to use the "blend wall" as a factor for setting annual blending requirements, the RVOs in the final rule should be considerably higher than what appeared in the proposed rule. At the same time, RFA and others continue to point out that nothing in the law allows EPA to waive statutory volume requirements based on perceived distribution constraints. Indeed, when carryover RIN credits, increased E15 and E85 usage, and higher gasoline consumption are all properly considered, it becomes abundantly clear that the conventional renewable fuel volumes established by Congress in 2007 are easily attainable.