Mandating the impossible
The average price of gas remains historically expensive around $3.60 per gallon. What you may not realize is that lawmakers in Washington could help alleviate your “pain at the pump” simply by getting out of the way.
In late July, a congressional hearing was held on government-mandated renewable fuel standards (RFS). The consensus among industry analysts and experts was that the RFS policy is driving gasoline prices higher. The policy also is distorting energy markets and imposing economic burdens on millions of Americans in ways that lawmakers never predicted.
In 2005, the government established the RFS policy, which was revised in 2007. The RFS policy requires refiners to blend a predetermined quantity of biofuel, such as ethanol, into their petroleum-derived gasoline.
Since the RFS standards were last revised, the nation's energy landscape has changed dramatically. Billions of barrels of oil and trillions of cubic feet of natural gas reserves have been discovered in the United States while, at the same time, U.S. greenhouse gas emissions have been declining.
Back when the RFS was established, demand for gasoline in 2010 was forecast to be in the neighborhood of 160 billion gallons annually. Thanks in part to the boom in natural gas production and improvements in automobile fuel efficiency, gasoline consumption was actually only 130 billion gallons in 2010 and has remained around that level since.
Yet, despite these changes, and despite the decline in gasoline consumption, the RFS remains static, unable to meet the challenges of today.
One of those challenges is the “blend wall.” Currently, nearly all ethanol is blended with traditional fuel at the accepted safe threshold of 10 percent. Accelerating ethanol mandates coupled with falling demand for petroleum means there is simply too much ethanol. If forced to blend these excessive supplies, refiners could be forced to create fuels that exceed the 10 percent threshold.
Fuels in excess of 10 percent ethanol can damage car engines. Currently, less than 5 percent of cars on the road are designed for use with fuels containing more than 10 percent ethanol.
Consumers can expect to see fuel prices rise even more in the near future if the RFS mandates are not mitigated. A study by NERA Economic Consulting predicts a 30 percent increase in the cost of gas and a 300 percent increase in the cost of diesel by 2015 — all as a result of RFS mandates.
The unintended consequences of the RFS mandate extend well beyond the pump. Some 40 percent of America's annual corn crop is now being directed into ethanol production. Since corn is the primary ingredient in livestock feed, a rise in price means a rise in the price of other farm commodities such as meat, poultry, and dairy products.
So thanks to the RFS, Americans are paying more to get to the grocery store and paying more for the groceries.
Topping it all off, a 2008 study in Science magazine found that once the global impacts from biofuel production are considered, biofuels release twice as much carbon dioxide emissions into the air compared to conventional gasoline.
There is hope. The EPA is considering lessening the RFS mandates in 2014 because of the blending wall problem. It should. Better yet, Congress should stop mandating the impossible and repeal the renewable fuels standards policy.
Wayne Winegarden, Ph.D., is senior fellow at the Pacific Research Institute and a contributing editor to EconoSTATS at George Mason University.
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