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Five Reasons Why Big Oil is Wrong

August 29, 2019


On Wednesday, the American Fuel & Petrochemical Manufacturers and the American Petroleum Institute sent a letter to President Trump in response to reports that the administration is considering measures to mitigate the harm that the renewable fuels industry has experienced as a result of the EPA’s continued issuance of small refinery exemptions (SREs) from the Renewable Fuel Standard.  The letter not only is misleading but also contains several factual inaccuracies.  Moreover, it contradicts positions that the API itself has previously taken. Misleading Statement #1: No Demand Destruction The AFPM/API letter states, “There are no lost gallons attributable to hardship waivers.” The letter misrepresents EIA data, which show there has been demand destruction from SREs.  Prior to the announcement of new SREs at the beginning of this month, the last major round involved 54 exemptions that were retroactively granted for compliance years 2016 and 2017, for which rumors and news reports began circulating in the market in early 2018.  As a result of these exemptions, domestic ethanol consumption fell in 2018 according to EIA data—the first year-over-year decline in more than 20 years. Additionally, ethanol’s share of U.S. gasoline consumption, known as the “blend rate,” fell in 2018, which was likely the first-ever annual decline. Nearly 300 million gallons more ethanol would have been used last year than actually occurred if the blend rate implied in the forecasts contained in the EIA’s January 2018 Short-Term Energy Outlook (STEO), which was conducted before the extent of the SREs became apparent, had been achieved.  In its January 2019 STEO, EIA even commented on the change in conditions that had caused it to lower its blend rate expectations, stating, “This stable ethanol share assumes growth in higher-level ethanol blends is limited by recently waived volumes of renewable fuel required under the RFS by way of numerous Small Refinery Exemptions … limiting the demand for higher levels of ethanol blending beyond 10% of gasoline (i.e., E10).” Since the latest round of 31 SREs for 2018 was just granted on August 9, it is too early for EIA data to reflect their impact. Misleading Statement #2: Cost of Compliance The AFPM/API letter states, “Hardship waivers do, however, provide small refineries with relief from high RFS compliance costs.” This is a reference to the cost of credits known as Renewable Identification Numbers (RINs), which are used to demonstrate compliance with the RFS. However, this flatly contradicts previous statements by the API, including a February 2018 letter to the EPA that asserted, “…RIN costs are largely recovered by refineries, both large and small, through the increased value of gasoline and diesel fuel they supply to the market.”  It went on to conclude, “These points make clear that small refinery exemptions are unnecessary as all parties should be subject to the same regulatory costs as their competitors.” Notably, in a November 2018 email to Bill Wehrum, then assistant administrator of the EPA, in advance of a meeting about SREs, Chris Grundler, director of the EPA’s Office of Transportation and Air Quality, indicated that “this is another big refiner vs. not so big refiner issue” and that the API told EPA “we should not be granting any of these petitions.”  The email was obtained through a Freedom of Information Act Request. Misleading Statement #3: Reallocation of Volumes Lost to SREs Is Illegal The AFPM/API letter states, “To ‘make up’ for the biofuel gallons allegedly ‘lost’ to hardship waivers, the biofuel industry now advocates for you to act inconsistently with the law by adding additional volumes to future year RFS mandates.” On the contrary, accounting for the volumes associated with SREs in setting annual volume requirements for the RFS is consistent with both the law and EPA regulations.  The formula used by EPA for calculating the annual percentage standards for the RFS has always included a variable for “projected volume[s]” of gasoline and diesel for exempt small refineries, and EPA has included non-zero values for these variables in rules establishing the renewable volume obligations in past years. In fact, documents from the White House Office of Management and Budget’s interagency review of the 2019 proposed rule reveal that EPA was actually planning to project SREs and reallocate volumes that were expected to be exempted, in order to ensure achievement of statutory RFS requirements.  In doing so, the Agency acknowledged its legal obligations and ability to account for SREs under its own procedures. In a June 20, 2018 draft, the Agency stated, “EPA is taking a different approach in this proposed rule. In calculating the 2019 percentage standards, we propose to project the exempted small refinery volume for 2019 based on the actual exempted small refinery volume for compliance year 2017.”  It further acknowledged, “EPA’s proposed approach implements CAA section 211(o)(3)(B)(i), which states that EPA ‘shall determine and publish … the renewable fuel obligation that ensures that the requirements of [the RFS program in CAA section 211(o)(2)] are met.’ Our grant of small refinery exemptions affects the amount of transportation fuel subject to the renewable fuel obligation for that year. Projecting the total exempted volume based on the most recent exemption data is an appropriate way to address this effect and facilitate the satisfaction of the RFS program requirements…” Days before the 2019 proposed rule was publicly released, the reallocation measures were inexplicably stricken from the text. Misleading Statement #4: Most Cars Cannot Run on E15 The AFPM/API letter states, “The majority of cars on the road today … are not designed or warrantied to run on ethanol blends greater than 10 percent (E10).” On the contrary, in 2011, the U.S. Environmental Protection Agency (EPA) legally approved the use of E15 in all cars and light-duty trucks built in 2001 or later, representing more than 92 percent of all registered cars and trucks on the road today. In fact, more than 93 percent of 2019-model-year vehicles are explicitly approved by the manufacturer to use E15, up from 2018, when approximately 89 percent of MY 2018 vehicles were formally approved by automakers to use E15. While ethanol opponents continue to spread false and misleading information about E15, American drivers deserve to know the truth: Nine out of 10 vehicles on the road today are legally approved by EPA to use E15, and 28 of the 32 vehicle lines reviewed carry the manufacturer’s approval of E15. Misleading Statement #5: Higher RIN Prices Drive Up Prices at the Pump The AFPM/API letter states, “Simply tacking on additional volumes to what EPA declares attainable would be arbitrary, unlawful, and do nothing to increase consumer demand for more biofuels. Such action would only raise compliance costs for all refineries and drive up fuel prices for consumers.” On the contrary, this assertion is like Statement #2 above, about who bears higher costs. An Oct. 2017 study found that changes in the prices of RINs did not cause changes in retail gasoline prices from 2013 through the summer of 2017. Retail gasoline prices were driven primarily by movements in crude oil prices and secondarily by changes in the spread between domestic and international crude oil prices and the level of vehicle miles driven in the United States, which varies seasonally. The best evidence of this is a chart that shows no true correlation:    As we noted elsewhere, it’s not small refineries closing or at risk due to the EPA’s action on the Renewable Fuel Standard—it’s ethanol plants and those who support them, starting with farmers.