The Renewable Fuel Standard (RFS) was created 20 years ago at a time of “peak oil” hysteria. President George Bush feared declining U.S. oil production and dependence on foreign oil. Domestic fuel from corn and other ethanol feedstocks was presented as a national security imperative. Two decades later, the U.S. is the world’s largest oil producer and a net exporter. The security imperative was met not by inferior, government-mandated fuels, but by American innovation and technology unlocking a vast domestic oil supply. The national security justification long since superseded, the RFS still clings on as a garden-variety, special-interest boondoggle.
In the folly of creating the RFS, there were at least a few level-headed people in Congress who foresaw the harms to come. Within the RFS statute, a waiver process for small refineries was included to protect small facilities from the compliance costs of the RFS. These small refinery exemptions (SREs) allowed refineries with less than 75,000 bpd of refining capacity to apply for hardship waivers from ethanol mandates. Many smaller refineries are located far away from refining concentrations and ethanol production facilities, making RFS compliance more difficult and costly. The purchase of RINs (RFS compliance credits) is an alternative to blending ethanol, but RIN costs can fluctuate wildly. Large refiners may have the balance sheets to absorb those costs, but smaller companies simply don’t.
Despite clear statutory support, the SRE process has long been in the crosshairs of the ethanol lobby because it subtracts from the overall government-mandated purchase of their product. They have sued and lobbied the executive branch in an effort to have the clear language read out of statute, either by regulatory or judicial fiat, but these efforts have repeatedly failed. The latest attack is through Congress as part of a legislative deal to approve year-round sales of 15% ethanol blend fuels.
The key legislative change deals with what facilities qualify for SREs. In current statute, any individual facility with less than 75,000 bpd of capacity can apply, even if owned by a company that also owns other refineries. In the proposed deal, this 75,000 bpd limit would apply at the company level, so that a company owning, for example, three small refineries of 30,000 bpd capacity each would no longer be able to apply for SREs for any of its facilities. This change flies in the face of the intent of the SRE provision, which was about preserving refining capacity.
This change has significant ramifications. Approximately 37 refineries in the U.S. qualify as small refiners currently, accounting for about 1.7 million bpd of refining capacity. This is a little over 10% of the nation’s refining capacity. Under the new definition, only 15 refineries would qualify, encompassing around 415,000 bpd of capacity. Thus, over 1.2 million bpd, 7% of U.S. capacity, will be subject to these higher compliance costs. For most of these refineries, blending ethanol is not a compliance option; they will be left with only two options: buy RINs, if they can afford to, or go out of business.
The cost of RINs is not a trivial amount. Using an estimate of 1.2 million bpd of production, the 2026 proposed RFS volume mandate Scenario A would require almost three billion RINs. Even in the low exemption Scenario B, 2.6 billion RINs would be needed. At $1 per RIN, around the prices seen at the end of 2025 for the most common RINs, that is $2.6-$3 billion in added compliance cost. However, RINs have seen much higher prices in the past. Some refiners argue that in order to meet the sharply higher proposed RFS volumes in the 2026 proposed rule, RINs will have to rise to more than $2, which doubles the estimate to $5.2-$6 billion or more. Even those numbers likely underestimate the total small refiner compliance cost since they assume that the remaining 15 eligible small refiners receive full waivers of their RFS mandates.
Profit margins in the refining industry are notoriously volatile. The largest refiners can ride out these fluctuations in a way that small companies can’t. Hundreds of millions of dollars in added compliance costs are the kinds of numbers that can tip smaller facilities permanently into the red.
Pushing small refineries into insolvency to prop up a government-mandated fuel program would be foolish in any circumstances. But the U.S. already lacks sufficient refining capacity to meet domestic demand. Since the pandemic, more than one million bpd of domestic refining capacity has been lost. Strict environmental regulations make expanding capacity at existing sites extremely difficult and building new refineries nearly impossible. Piling new, entirely unnecessary burdens on our remaining refining capacity is the last thing this country needs.
