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The Oil Industry's Fight to Kill Renewable Fuels—and Why It May Win

For all its faults, the Renewable Fuels Standard is the only federal policy that is steadily eroding the oil industry's de facto monopoly on motor fuels.

Feb 10, 2014

The American oil industry could be on the verge of winning its war on the federal Renewable Fuel Standard (RFS), as the Obama administration weighs changes that could severely undermine the nation's most successful—and most divisive—effort to cut crude oil consumption in the nation's cars.

Faced with what it called an "inadequate domestic supply of renewable fuels," federal regulators in November proposed lowering the 2014 usage requirements for the total volume of renewable fuel and for advanced biofuels. Last month, regulators said they may also grant oil industry requests for waivers on their biofuel obligations for 2014 as well as for fiscal 2013, which ends in June.

The moves triggered howls from biofuels companies and representatives from corn states fearful that those setbacks will lead to others, and that uncertainty over the program will pull the rug from under the fledgling market for advanced biofuels. The Environmental Protection Agency is expected to rule on the proposed biofuel reductions and the oil industry waivers in the coming months.

Of course, the potential unraveling of the RFS is complicated and highly controversial. The program's troubles stem primarily from sinking gasoline demand, overly optimistic biofuels targets and 2012's drought-driven rise in corn prices. In addition, the ongoing dependence on corn-derived ethanol has further inflamed critics who say the rush to produce that kind of ethanol has been gobbling up land and diverting food to U.S. gas tanks.

But, for all its struggles and faults, the RFS accomplished things that almost no other gasoline additive or alternative was in a position to achieve so quickly.

For example, the growing use of ethanol and other biofuels has reduced tailpipe emissions that cause air pollution and that are linked to health problems ranging from asthma to cancer. And now that more efficient ethanol plants are in place and U.S. refiners are making more fuel from Canada's dirtier tar sands oil, it's clear that biofuels also generate less greenhouse gas emissions than gasoline—even in the case of corn ethanol.

What's more, biofuels have supplanted billions of gallons of petroleum in gasoline and diesel, a trend that is cutting overall oil demand and steadily eroding the oil industry's de facto monopoly on transportation fuels.

That has made reining in—or preferably, repealing—the renewable fuel requirements a top priority for oil companies in the last year. The result has been a high-octane battle pitting two of the nation's most potent political and economic forces against each other—the oil industry and corn ethanol interests, groups collectively known in political circles as "Big Oil" and "Big Corn."

"There's a lot of bad blood between those two industries," said Gal Luft, senior adviser to the U.S. Energy Security Council and an advocate of diversifying the nation's motor fuels.

With the economic stakes so high, the head-to-head features all the hallmarks of a yet another Washington showdown: Powerful lobbying, unlikely coalitions, court battles and dueling research, all of it infused with hyperbole and scare-mongering, and then spread far and wide through expensive advertising and public relations campaigns.

Farm state officials have taken to calling the EPA's move a "war on corn," and have warned that the RFS changes would crush the fledgling biofuel industry and ravage states that have prospered from growing corn and other biofuel feedstock as well as hosting the fuel processing plants. The oil industry's main lobbying arm, the American Petroleum Institute, has countered with a dire prediction that higher ethanol mandates could harm consumers, damage their automobiles and trigger fuel rationing and supply shortages. API's allies include the trade association for refiners, livestock and poultry groups, a wide range of food interests and some environmentalists.

Tom Kloza, a long-time oil analyst, described the extreme polarization this way: "You'll get on an [oil industry] conference call one day, and it will make you think that you've got to be a pinko-commie-bedwetting-sympathizer to be an advocate for ethanol. Then you get on a press conference for [renewable fuel groups], and they'll make you think you're some goose-stepping Stalinist if you prefer hydrocarbons.

"There's no in between," said Kloza, who works for the Oil Price Information Service and Gas Buddy. "You don't hear anything that's in the spirit of compromise."

Oil's De Facto Monopoly

Some have opposed the RFS as a matter of principle, arguing that government mandates distort markets and prevent competing products from winning over consumers on their merits. But free-market purists face a dilemma when it comes to the U.S. fuel supply: Almost all car owners are locked into gasoline and couldn't switch to a competing fuel if they wanted to.

"There is a mandate in place today, though most people don't think of it as a mandate," said Luft, senior advisor to the U.S. Energy Security Council, a group of business leaders and former high-ranking government officials that works to reduce dependence on oil. "If you have cars that offer you only one fuel, that’s a mandate."

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