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."
The oil industry's de facto monopoly starts with the nation's 230 million cars, vans and pick-ups. More than 93 percent of them run on gasoline. Then there's the infrastructure issue: Oil companies spent a century building and honing a vast network of refineries, pipelines, tanker fleets and gas stations, and all of it is devoted to making gasoline available nearly anywhere the motoring public wants to go. Oil companies are similarly entrenched in the diesel market.
That command over the market was not a big concern for the government or consumers when oil was relatively cheap. These days, though, $100-per-barrel oil is becoming the norm, and the recent surge in lower-priced domestic crude production hasn't provided much relief at the pump.
But the escalating cost of motor fuel is just one of the reasons the federal government has taken aim at the nation's deep reliance on petroleum.
Tailpipe emissions are a significant source of air pollution and health problems ranging from asthma to cancer. In addition, researchers established a link between burning carbon-laden fuels and global warming, making petroleum a key contributor to climate change.
America's steadily rising appetite for petroleum was becoming a problem, too. Up until the recent recession, oil consumption seemed headed nowhere but up, and that trend increased the country's dependence on imported oil, creating foreign policy headaches and exacerbating price volatility at the pump.
The most publicized renewable energy sources, wind and solar, are of little use on the oil front. They are producing power for the nation's electricity market, which is still dominated by nuclear power, coal and natural gas. Petroleum provides just one percent of the nation’s electricity, according to the U.S. Energy Information Administration.
When it comes to reducing oil consumption, there's no better target than transportation. Cars, motorcycles, buses, trucks, ships and planes gulp down more than 70 percent of the petroleum used in this country.
Rising fuel efficiency standards have already played an important role in reducing demand for gasoline, and they will cut demand further as higher mileage requirements kick in. Increasing sales of hybrid vehicles and those powered exclusively by natural gas, electricity, propane and hydrogen are chipping away at the gasoline fleet.
But those measures require new cars, so their success is limited by how many—and how quickly—specialty vehicles get purchased in lieu of gasoline-fueled versions. All those alternative vehicles combined are expected to wrest away just 11 percent of the gasoline vehicle market over the next decade, according to a study conducted for the Fuels Institute.
Why Biofuels Landed a Role
Getting more immediate results meant finding a way to rein in the fuel consumption stemming from the hundreds of millions of cars and other light-duty vehicles that were already on the road. And that's why ethanol and other biofuels landed a big role in the push to use less oil.
When the federal Renewable Fuel Standard was created in 2005, ethanol, in particular, had many attractive attributes. It could be safely and easily added, or "dropped in," to the existing gasoline supply. It required relatively few changes to the existing fuel distribution system. Customers could safely fill up as usual.
What's more, ethanol could be made from home-grown crops such as corn, and it was already being blended into gasoline as an octane booster. Best of all, blending more into each gallon of gasoline could meaningfully cut oil consumption and, it was hoped, reduce greenhouse gases and harmful tailpipe emissions at the same time.
The new biofuel requirements represented a major shift. For the first time, the government was calling for broad use of renewable fuels, in mandated volumes that were stepped up over several years. Congress revamped and expanded the program in 2007's Energy Independence and Security Act, adding renewable diesel and creating aggressive targets for still-evolving second-generation biofuels such as cellulosic ethanol, which many consider a preferable version of fuel ethanol because it is made from sources such as cast off plant material instead of corn.
When the new mandates took effect in 2010, they called for specific volumes of biofuels to be consumed in the nation's vehicles. The total requirement was broken out into four categories: Conventional biofuel (mostly corn ethanol), cellulosic biofuels, biomass-based diesel and other advanced biofuels. For environmental reasons, the law set a maximum volume that could be satisfied with the likes of corn ethanol, placed restrictions on the biomass that could be used, and excluded advanced fuels that did not cut greenhouse gas emissions.
What Went Wrong for the RFS?
Under the new RFS, renewable fuel use was to grow from 9 billion gallons in 2008 to 37 billion gallons by 2022, with 16 billion gallons of that—or 43 percent—to come from cellulosic biofuels. So far, the underlying yearly milestones have proven to be wildly unrealistic.
The reason is that the program's lofty goals were set based on a few basic assumptions that turned out to be incorrect or naïve. The first assumption was that the nation's demand for gasoline would keep rising, creating an ever larger pool of fuel in which to blend higher volumes of ethanol. Second, that a host of enterprising biofuels companies would quickly ramp up production of advanced renewable fuels to meet the mandates.
And third, that fuels blended with higher amounts of biofuel—especially E85, gasoline with up to 85 percent ethanol in each gallon—would be offered and gain acceptance among consumers with compatible vehicles. Nationwide, there are more than 16 million flexible-fuel vehicles made to run on regular gasoline blended with any level of ethanol up to E85. If the price was right and consumers bought it, E85 producers could sell a lot of extra gallons of ethanol, pocketing extra RFS credits that could be sold to companies that fell short.
Things didn't turn out the way the EPA expected, though. Soaring gas prices, the recession and other factors caused U.S. fuel demand to drop instead of continuing to rise. Production of new forms of biofuels stumbled out of the gate and badly lagged expectations.
Then, sales of E85 never got off the ground in most states, partly because consumers weren't asking for it, and partly because consumers weren't offered it. Most motorists outside the Midwest don't know if they have flexfuel vehicles or have been scared off by the lower miles per gallon associated with E85.
It didn't help that many oil companies have provisions in their franchise agreements that either forbid or strongly discourage gas station owners from offering E85.
Oil refiners are reluctant to pave the way for blending more biofuel into gasoline and diesel, because that cuts into demand for the petroleum content in each gallon of fuel, said Kloza, the oil analyst. So they're thinking, "If we embrace E15 or E20 or E30 or E85, what are we going to do with the hydrocarbons that we produce at these billion-dollar asset refineries?"
Today, nearly every gallon of U.S. gasoline contains 10 percent ethanol. In 2013, cellulosic biofuel use was supposed to be one billion gallons, but it is still nearly zero. The requirement for advanced biofuels was way off too. Corn ethanol, which the RFS caps at 15 billion gallons per year, is estimated to have provided more than 12 billion gallons in 2013.
So the EPA has to figure out how to keep getting more gallons of biofuels into a market where refiners and others contend that gasoline can't be loaded with any more than the current 10 percent of ethanol or it would damage cars—something that has been disputed. The EPA approved a 15 percent ethanol blend for use by 2001 and newer vehicles, but there is considerable opposition to it becoming widespread. Some car warranties could be voided by using E15, and owners of boats, chainsaws and lawn equipment say the higher blend would damage their engines.
Oil Industry Winning as Uncertainty Permeates
Despite those challenges, the law still requires the oil industry to sell a mandated amount of the more advanced biofuel, or buy RFS credits in lieu of those volumes. Given that advanced biofuels production remains a relative trickle, refiners have complained that they're being required to sell "phantom fuels."
The industry has sought waivers for certain RFS requirements for 2013 and 2014, and is pressing hard to get the renewable fuel program repealed or gutted. The EPA's recent moves were partly driven by those oil industry complaints.
And while nothing's set in stone yet, no matter what happens, lawsuits are sure to follow. In addition, Sen. Dianne Feinstein, a Democrat from California, recently weighed in with a bill that would strip corn-derived ethanol from the RFS.
Just by putting the biofuel mandates—and thus the market for biofuels—in doubt, RFS opponents have already dealt a big blow to the industry for non-carbon fuels, according to experts. The EPA's proposal has already rattled farmers and investors in biofuel plants, and injected enough uncertainty to undermine funding for expanded production as well as upstarts eyeing the market for non-corn renewable fuels.
"It sends a signal to investors that the U.S. can't play the long game anymore…that we're not serious about opening a marketplace for new fuel technologies, and that perhaps the money is better spent somewhere else," Jan Koninckx, global biofuels business director for DuPont, told the EPA in December, during the agency's 12-hour public hearing on its proposal to cut back the RFS.
"It's not a death warrant for ethanol," Kloza said. But, he added, "It means that the standard is going to be a 10 percent blend for ethanol. And for the moment, it removes any real incentive for the cellulosic folks."
The Natural Resources Defense Council, not a fan of corn ethanol, is hopeful that the RFS fight leads to changes that strengthen and accelerate the shift away from petroleum-based fuels.
"If the RFS is to broaden our fuel choices over the long term, it must survive over the long term," NRDC's Brian Siu in his blog. "That means making adjustments along the way that create a realistic, politically stable, and environmentally sustainable policy."