In their recent op-ed on the ethanol mandate and gas prices, Tom Buis and Bob Dinneen greatly misled Politico’s readers with both contradictory claims and withholding crucial facts. Both the government’s own analysis and common sense tell us ethanol mandates are costly. The way to bring down gas prices is less government interference, not more.
The reader doesn’t need a PhD in economics to see the smoke and mirrors in the Buis and Dinneen piece. Early on, they claim that Renewable Identification Number (RIN) credits for ethanol are “free,” and that they were “created at the oil companies’ insistence.” Then in the very next sentence they say that early this year “the price of RINs rose dramatically,” and later in their op-ed state that petroleum industry trade groups are spending “millions of dollars” to attack the renewable fuel mandates.
Now regardless of what the reader may think about oil companies, the above claims make no sense. Here’s what really happened: The federal government has established a Renewable Fuel Standard (RFS) that requires refiners to blend in a minimum amount of ethanol into the nation’s fuel mix. Recognizing that certain refiners are closer geographically to the source of ethanol, the refining industry asked that a credit trading system be implemented. This way, if it were cheaper for Refinery X to blend in additional gallons of ethanol, it could more than meet its quota of the mandate, to take the onus off of Refinery Y, where it would be more expensive. In order to share the pain equitably, Refinery X would sell its surplus RIN credits to Refinery Y. Thus, the nation as a whole would still meet the aggregate ethanol mandate required by the federal government, while minimizing the economic costs of compliance. This is the limited sense in which the oil industry “asked” for the RIN system.
As far as Buis and Dinneen’s claims that RINs are “free,” the simple fact is that RIN credits spiked from 7 cents early in 2013 to over $1 in March. Of course this represents a genuine burden to refiners. The federal mandate is causing individual companies to do things that they otherwise would not choose to do. If it really made economic sense to blend in 13.8 billion gallons of ethanol into the fuel mix this year (what the RFS requires), you wouldn’t need a federal mandate forcing the refiners to act this way.
Indeed, as a USDA research paper on the ethanol mandate from November 2011 explained:
Understanding the RIN system and the prices for RINs when bought and sold can provide key insights into the impact of mandates on biofuel and feedstock markets. For 2011, conventional ethanol RIN prices have been low, implying low probability that the corresponding mandate has been…Conversely, biodiesel RIN prices have been high in 2011, implying a more binding biodiesel mandate with effects on soybean oil and other biodiesel feedstock markets.
Things have changed since that paper was published, in that ethanol RINs are now much costlier. Why are refiners willing to pay so much? Because the mandate itself (given other economic factors) is much more binding now, than in 2011. When you impose costly burdens on businesses, don’t be surprised when consumer prices (in this case, gas prices) go up.
Buis and Dinneen point to an academic study claiming that ethanol actually makes driving cheaper for motorists. Yet these claims too are dubious. First and most obvious, Buis and Dinneen don’t mention that a gallon of conventional gasoline has 47 percent more energy than a gallon of ethanol. Thus a gallon-to-gallon price comparison is misleading. Further, when empirical studies argue that ethanol keeps down pump prices, they usually mean in the vacuous sense that the refining industry has adapted to federal mandates for ethanol, and if ethanol suddenly disappeared tomorrow, then pump prices would rise while the industry responded. But if the mandate had never been enacted in the first place, there would be more conventional refining capacity available.
Beyond wading into the technical statistical analyses, we can conclude with a commonsense observation: If Buis and Dinneen actually believe that ethanol is more cost-effective for consumers, then they should call for an immediate abolition of the federal mandates for ethanol. But they won’t do that, of course, because they know that the ethanol mandate is inefficient and makes refining costs higher than they otherwise would be. The way to deliver relief at the pump for American motorists is to get government taxes and mandates out of the energy sector.