02.23.2018 0

The RFS has bankrupted its first refinery, more to follow

By Printus LeBlanc

Americans for Limited Government has been warning of the impending bankruptcies in the petroleum refining industry for some time now. Well, the first canary, Philadelphia Energy Solutions (PES), has died, and the only question left is how many more will die before the Environmental Protection Agency (EPA) and Congress wake up.

In 2005, Congress passed, and President Bush signed the Energy Policy Act of 2005. Among the many new regulations created in the legislation, the Renewable Fuel Standard (RFS) was birthed. The RFS mandated a certain amount of renewable fuels, mostly corn ethanol, be blended with gasoline. The amount was 4 billion gallons in 2006 with a rise to 7.5 billion in 2012.

In 2007, the Energy Independence and Security Act of 2007 was passed. The bill increased the amount of renewable fuel to be blended. It required 9 billion gallons be blended in 2008 with an increase to 36 billion gallons in 2022. Of course, this made the subsidy loving corn growers extremely happy. The federal government was now mandating citizens purchase their product. And we wonder where they got the idea for the Obamacare individual mandate.

To track the renewable fuel usage, Renewable Identification Numbers (RIN) were created. A RIN is a string of numbers and letters used to identify each batch of biofuel produced. The RINs count towards the Renewable Volume Obligation (RVO), an amount designated to each refinery by the EPA. The RINs are the problem.

When the EPA instituted the program, it believed the costs would only be a few cents per RIN. As usual, when the federal government gets involved the costs spiraled out of control. Wall Street speculators now routinely drive up the prices. In one seven-month period in 2013, the value of one RIN went from 7 cents to $1.43. The volatility is creating economic hardships for refiners across the nation and has caused the largest refinery on the east coast to declare bankruptcy.

PES filed for Chapter 11 bankruptcy protection in January with over an estimated $600 million in debts. The company owns the largest refinery on the East Coast with the capability to refine 335,000 barrels per day.  In the bankruptcy filing, PES stated the second largest expenditure behind crude oil was RINs, spending $218 million on the imaginary numbers in 2017.

Mixing ethanol and gasoline is not as easy as it sounds. A refinery, like the PES facility, cannot combine the two ingredients at the plant. Because ethanol degrades the mixture over time, there is a relatively short shelf life once the two chemicals are mixed, around three months. For this reason, the ethanol is mixed in at the point of sale to the consumer.

This does not have an impact on refineries that own gas stations. Several of the larger companies like Exxon and Saudi Aramco also own gas stations across the country. What are small and medium-sized refiners to do, go out and spend millions to purchase gas stations?

Of course, King Corn could care less about the companies going bankrupt because they are being forced to buy their product. All King Corn cares about is making sure the government mandate stays in place, regardless of the outcome to the consumers or refiners.

However, there is a middle ground everyone can agree on. Allowing RINs attached to exported biofuels to be counted towards the RVO benefits almost everyone:

  1. The refiners no longer must pay twice for RINs;
  2. The corn producers still produce the same amount of corn, and will have greater access to overseas markets;
  3. Increases American exports;

EPA Administrator Pruitt must act quickly. The first canary in the ethanol corn maze is dead. The next one is likely to come from Delaware. It is time to reform the RFS and get the government out of picking winners and losers. The RINs system must be updated.

Printus LeBlanc is a contributing editor at Americans for Limited Government.

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