An Assessment of the Economic Consequences of the Renewable Fuels Mandate

• Under U.S. law, U.S. petroleum refiners and other so-called obligated parties must blend ever larger volumes of renewable fuels into the U.S. gasoline and diesel fuel supply. The program is known as the Renewable Fuel Standard (RFS).
• Corn ethanol is not mandated under the RFS. However, 98% of “conventional biofuels” produced in the U.S. and blended into gasoline are derived from corn, thus creating a de facto mandate for corn ethanol.
• The RFS mandate for conventional biofuels s set to rise from 13.2 billion gallons in 2012 to 15 billion gallons in 2015. With the additional mandate for advanced and cellulosic biofuels, the total blending requirement rises to 36 billion gallons by 2022.
• The U.S. Environmental Protection Agency (EPA) administers the RFS program and is the only U.S. agency with the authority to waive or delay implementation of volumetric mandates for renewable fuel blending into the gasoline and diesel pools.
• In response to concerns over reductions in corn production from the widespread drought, five state governors have petitioned the EPA to either reduce or waive the RFS mandates and nearly 200 members of Congress (from both the Senate and House) have publicly announced their support for a waiver.
• The EPA announced on August 20, 2012 that it will accept comments for 30 days on the governors’ waiver request.
• The EPA is expected to act on the requests before November 13, 2012, but the agency’s likely response, if any, is unknown.

U.S. Corn Harvest Down 28%

• Drought throughout much of the U.S. farm belt is expected to severely reduce the 2012 corn crop. The U.S. Department of Agriculture (USDA) in June 2012 predicted a record 14.79 billion bushels of corn for the current harvest, but their forecast was revised down to 10.73 billion bushels in September 2012.
• Poor expectations on corn harvests are now setting all time price records with corn rising above $8 per bushel.
• Ethanol is currently blended into the gasoline pool at 9.7% concentration and blending volumes plateaued in 2010. But volumetric requirements under the RFS will soon take ethanol past the 10% “blendwall.”
• At that time, the gasoline pool will be completely saturated by ethanol at virtually 10% concentration, carryover RINs (renewable identification numbers) will be exhausted,
• ….there is a distinct risk that the blendwall will be breached in 2013.
• Unless the blendwall is pushed off by several years, obligated parties will continue to face a strong economic incentive to continue blending ethanol at up to 10% concentration and acquire RINs in the current period to apply to future obligations.
• Ethanol producers have called for no revisions in the mandate for blending of conventional biofuels into the transportation fuel supply.

EPRINC’s findings are as follows:

• A near term waiver of blending requirements (6 months to 1 year) would have little effect on corn demand for the production of ethanol. Obligated parties would still have to plan for RVO compliance once the waiver ends. Blending would still have to occur at high levels now, as obligated parties would want to acquire RINs to prepare for the high (and future) cost of crossing the blendwall. Refiners will also need time to adjust their gasoline yields in response to lower ethanol production. A longer term waiver (2-3 years) at some level at or below the blendwall would allow for a proper assessment of the nation’s crop situation, provide end-users with a stable planning environment, and permit refining operations to adjust fuel output. Such a waiver would likely reduce corn prices, providing economic benefits in the form of feed and food prices, and would reduce the risk of a price spike in gasoline as obligated parties begin blending ethanol at levels above 10% of the gasoline pool.
• There are no low-cost solutions for marketing renewable fuels into the transportation fuel supply in the near-term at levels above 10% of the gasoline pool.
• So called higher ethanol blend options, such as E85 (70-85% ethanol blends for flex fuel vehicles) have failed to achieve market success due to their high cost, poorer mileage performance relative to gasoline, and lack of availability. EPA has recently approved E15 for model year 2001 and newer light duty vehicles. E15, however, faces a large number of infrastructure, liability, and cost issues, all of which will limit widespread adoption. Auto manufacturers have not provided warranties for non-flex fuel vehicles using so-called E15 blends.
• By-product production of feed from ethanol production, DDGS, has not substantially lowered the cost of raising livestock in the United States. The ethanol industry purchases approximately 40% of the U.S. corn crop and is the largest purchaser of corn in the United States. Even when DDGS volumes are returned to the livestock feed supply chain, 30% of U.S. corn production is consumed for fuel production.
• Despite the droughts and record prices for corn and other crops, the RFS has ensured that billions of bushels of corn and soy are set to be converted to fuels which offset less than 5% of the nation’s petroleum fuel supply. The U.S. refining industry could make up the loss of all biodiesel and 400,000 bbl/d of ethanol production by adjusting gasoline yields within their historical 10 year range while remaining a net exporter of distillate fuel. The additional fuel production from refiners would require both adequate time to make the adjustments and an expectation that government policy would not impose long-term uneconomic blending requirements, i.e., blending at levels above 10% of the gasoline pool. As stated above, EPRINC’s assessment is that ethanol blending would continue at or above 400,000 b/d even in an environment free of blending mandates.

On April 16, Tesoro President and Chief Executive Officer, Gregory J. Goff sent a letter to House Energy and Commerce Chairman, Fred Upton in support of the Gasoline Regulations Act of 2012.

Click here to view a PDF of the letter.

On behalf of Tesoro and Valero’s nearly 4,000 employees in California, we would like to express how disappointed we were to hear Gov. Schwarzenegger once again misrepresent and demonize our companies and our workers, who have been working day after day to provide Californians with the products and services they need to live their lives.

We understand that our companies and the governor are on opposite sides of the debate over Proposition 23, the ballot initiative that gives California voters the opportunity to postpone implementation of the state’s costly go-it-alone greenhouse gas reductions until the state’s economy recovers. However, opposing a political initiative is no excuse to retreat to the defense of the desperate: attacking the messenger instead of the message by insulting the more than 1 million Californians who work at our locations, who are vendors at our sites, and who shop at our retail outlets every day.

It may make for great headlines for the governor to denigrate Proposition 23 supporters as “greedy” or “cynical” – or even to compare them to Nazis, as he did in his speech on Sept. 27 to the Commonwealth Club – but doing so ignores the facts: Valero and Tesoro have donated millions of dollars to California charities in the years that we have operated in the state. Our employees have volunteered thousands of hours of their own time to charitable causes. We have met or exceeded California’s very rigorous environmental standards. And we have continued to do so even as our companies suffered financial losses in the current recession. In short, we have worked to make all of the communities where we do business better places.

Tesoro and Valero are just two of many, many California organizations that support Proposition 23. Neither of our companies can be properly characterized as “Texas oil companies.” Our companies have diverse operations in many states, particularly in California. Combined, we employ 3,841 people in California with annual payroll of $259 million. We also pay over $100 million in taxes in the state. Nor are we, strictly speaking, “oil companies.” We do not produce oil or own any crude oil reserves. Instead, we buy crude from third parties and turn it into the transportation fuels so vital to the California economy.

Proposition 23 isn’t a yes or no vote on the need for climate change regulation, but is simply one about timing of the regulation. Proposition 23 simply states that now is not the time to impose such an economic burden on the citizens of California. The proposition would only delay the imposition of the state’s climate change rules until unemployment drops from its current 12.4 percent to 5.5 percent, a rate that is still higher than when the law was passed. We believe that without the passage of Proposition 23, California’s economy and its citizens will suffer:
1.1 million lost jobs
$3.7 billion a year in higher fuel costs
Up to a 60% increase in electricity and natural gas costs
Up to $50,000 added to the cost of a new home

Valero and Tesoro have a vested interest in seeing California’s economy improve, but at this point, California’s economy is in deep trouble. We disagree with the governor and other Proposition 23 opponents about whether this is the proper time to implement costly new regulations, but surely we can agree that this is not the time for insults, invective and demagoguery. Let the voters weigh the cost of climate change rules and decide if they want to bear that cost right now. They should decide on the basis of facts, not on the basis of attacks on concerned corporate citizens who are working in the best interest of Californians.

Sincerely,

Greg Goff, CEO, Tesoro Corp.
Bill Klesse, Chairman and CEO, Valero Energy Corp.