Reduction to 2014 RVOs Would be a Financial Windfall for Big Oil

Posted on: November 06, 2013 in EPA, Ethanol, Gas Prices, Oil, RINs, RVOs

Big Oil has developed a laundry list of excuses for failing to break through its self-imposed “blend wall” and refusing to embrace the Renewable Fuel Standard (RFS).  Among the red herring arguments for its intransigence toward using more renewable fuels are feigned “consumer safety issues,” manufactured “infrastructure problems,” and imaginary “misfueling concerns.”

But let’s be honest. The oil industry’s crusade against the RFS isn’t about the interests of the American consumer. It’s about money, market share, and snuffing out competition. As former Agriculture Secretary John Block recently wrote, “Refiners have already lost 10 percent of the gasoline market to ethanol, and they are leaving no stone unturned in their effort to block cleaner, cheaper biofuels from taking more of their market share.”

All of which brings us to the battle over 2014 renewable volume obligations (RVOs).  A “leaked” draft of EPA’s proposed 2014 RVOs suggested the Agency was considering a reduction of the “renewable fuel” requirement from the statutory level of 14.4 billion gallons (bg) to 12.36-13.18 bg.

Not only would such a reduction violate the law, but it would also amount to a multi-billion dollar giveaway to Big Oil. Reducing the amount of renewable fuel required would decrease refiner and blender purchases of ethanol, increase the sales volume of gasoline, increase the price of gasoline, and eliminate the need for investments in modern refueling infrastructure. All of that adds up to a windfall for Big Oil in 2014—potentially in the range of $9.2-$15.2 billion.   This amount of money is roughly equivalent to 8-13% of net profits for the “Big Five” oil and gas companies in 2012.[1] Here’s how cutting the 14.4 bg renewable fuel requirement would further enrich oil and gas companies:

  1. Cutting the renewable fuel requirement by 1.22-2.04 billion gallons would reduce ethanol production and decrease refiner and blender purchases of ethanol by $2.1-$3.6 billion. These are dollars that would have otherwise been injected into the rural American economy.
  2.  

  3. In turn, oil companies would increase production and sales of gasoline to fill the void left by the reduction in ethanol blending. Between 850 million and 1.4 billion gallons of gasoline would be needed to fill the gap in the fuel supply left by reducing the RFS. This gasoline would undoubtedly be refined from imported or unconventional crude oil. Refiners would rake in $2.3-$4.0 billion in revenue from selling this amount of gasoline.
  4.  

  5. Replacing the amount of ethanol that would be lost by a reduction in the RVO results in increased demand for gasoline. As a result of this increase in gasoline demand, pump prices would rise nationwide.  Marzoughi & Kennedy of Louisiana State University found that “… for every billion gallons of increase in gasoline demand, gasoline prices rise as much as $0.06 cents. Adding ethanol to gasoline has the same impact on gasoline as a positive shock to gasoline supply.”[2] Thus, reducing ethanol production by 1.22-2.04 billion gallons would result in an increase to gas prices of $0.05-$0.09/gallon (assuming 0.7 gallon of gasoline replaces 1 gallon of ethanol). In other words, Americans would spend an additional $6.8-$11.3 billion on gasoline in 2014.
  6.  

  7. Slashing the renewable fuel requirement would also send a strong signal to obligated parties that investments in modern refueling infrastructure are not necessary. While the infrastructure to distribute the statutorily-required 14.4 bg of ethanol in 2014 is already in place, investments in infrastructure to distribute required volumes in 2015 and beyond will come to halt if EPA cuts the 2014 requirement to a level below the “blend wall.” Economists at Iowa State University (ISU) estimate 2,500-5,000 new E85 stations would be needed to distribute the amounts of ethanol required under the RFS in 2015 and 2016. ISU estimates the cost of adding E85 could range from $30,000 to $130,000 per station. Using the midpoint of $80,000 per station, total investment would be in the range of $200-$400 million (incidentally, that’s less than Valero claims it will spend on RINs in 2013). Investments in new stations needed in 2015 and beyond would likely be made now and in 2014 if EPA provided a clear signal that it will enforce the statutory requirements for renewable fuel.

The table below summarizes the potential windfall to Big Oil. With market share to lose and $9-$15 billion to gain, it’s no wonder that the American Petroleum Institute and its cronies are pulling out all the stops to stall the transition to more renewable fuels. Simply put, a decision to lower the RVO in 2014 would amount to a substantial transfer of wealth from American farmers and small businesses in the Heartland to glutinous multi-national oil and gas conglomerates. 

 

EPA Option 1

EPA Option 3

EPA Option 2

Reduction in Ethanol Blending[1]

Billion gals.

1.22

1.41

2.04

Ethanol price[2]

$/gal.

$1.75

$1.76

$1.78

Oil industry avoided purchases of ethanol

Billion $

$2.14

$2.48

$3.64

Increase in Gasoline Consumption[3]

Billion gals.

0.85

0.99

1.43

RBOB price[4]

$/gal.

$2.75

$2.76

$2.78

Oil industry revenue from increased gasoline sales

Billion $

$2.35

$2.72

$3.97

Increase in gasoline price due to reduced

ethanol blending [5]

$/gal.

$0.05

$0.06

$0.09

Aggregate increased expenditures on gasoline

Billion $

$6.76

$7.81

$11.30

Oil industry avoided investment on ethanol

infrastructure[6]

Billion $

$0.30

$0.30

$0.30

TOTAL FINANCIAL IMPACT TO OIL INDUSTRY

Billion $

$9.19

$10.59

$15.24

    Enlarge this table.

  1. Based on media reports of EPA “leaked” RVO proposal
  2. Base 2014 ethanol price is based on the average of 2014 CME futures contracts ($1.70). Prices in EPA scenarios estimated using price elasticity of -.25 from Marzoughi and Kennedy.
  3. Conservatively assumes 0.7 gal.of gasoline replaces 1.0 gal. ethanol
  4. Baseline 2014 RBOB price is based on the average of 2014 CME futures contracts ($2.70). Prices in EPA scenarios estimated gasoline price change from Marzoughi and Kennedy
  5. Based on Marzoughi & Kennedy (2012)
  6. $300 million is midpoint between $200 and $400 million (based on CARD Policy Brief 13-PB 13)

[1] Combined net profits for ExxonMobil, BP, Chevron, ConocoPhillips, and Shell totaled $118.1 billion according to company earnings statements.

[2] Hassan Marzoughi and P. Lynn Kennedy. The Impact of Ethanol Production on the U.S. Gasoline Market. Selected Paper prepared for presentation at the Southern Agricultural Economics Association Annual Meeting, Birmingham, AL, February 4-7, 2012. P 15.

ę More Blog Posts

blog comments powered by Disqus