By Robert Campbell
NEW YORK, Aug 6 (Reuters) - Eight months after the legaldeadline the Obama Administration has released the 2013Renewable Fuels Standard rule. More importantly it promisedwaivers next year that will supposedly keep this badly designedlaw from inflating gasoline prices.
Is this a cause for celebration? Hardly anyone will be trulyhappy with this decision. The agricultural lobby will bedismayed by the tacit abandonment of the effort to dump evermore corn into the nation's fuel mix.
Those merchant oil refiners who do not blend their own fuelsuch as Valero or CVR Refining are still on thehook to buy up as many ethanol blending credits, known as RINs,as they were before.
The firms that profit from this set up - the traders andhedge funds that have been speculating on RINs as well ascompanies like oil major BP that blend more gasoline thanthey import and manufacture - will still be winners from thisflawed system but even they must be wondering if it would bepreferable to have a clear legal regime rather than an endlessseries of ad hoc fixes.
So what have the regulators done? They've thrown a bone tothe losers in this trade in the form of an extended compliancedeadline and a reduction of the unworkable advanced biofuelsrequirement that will ease the pressure on buyers for 2013.
But say you are a trader at one of the firms short RINs. Howwould you trade for 2014? Would you slow purchases in the hopethat the Environmental Protection Agency's 2014 RINs rules areflexible enough to keep your requirements under control? Or doyou instead keep buying to try and hoard 2013 RINs?
In essence all the EPA has done is admit that the RenewableFuel Standard is irretrievably broken without offering a fix.And to be fair it is outside of the EPA's duties to fix theRenewable Fuels Standard (RFS) which is, after all, an act ofCongress.
But the United States is now going through the spectacle oftrying to enforce the functioning of a renewable fuels policythat it acknowledges is broken.
TIME TO ACT
The problem is, as we all know, extensive. The RFS assumes agasoline market that is much bigger than it is in reality andone that is growing robustly rather than contracting. Nor areadvanced biofuels anywhere near commercial availability. Andfinally it offers no solution to the thorny question ofliabilities arising from the sale of fuel blends with more than10 percent ethanol.
Fixing these issues means substantial changes to the RFS andthe Obama administration seems to have signaled that it iswilling to abandon the push to greater than 10 percent ethanolblending in conventional gasoline.
The biofuels industry is also unlikely to be very happy withthis ruling. While backers had been ready to throw advancedbiofuels requirements under the bus to preserve market share forconventional biofuels, such as corn derived ethanol, they wereadamant that the fuels industry should simply be forced to shiftto higher ethanol content fuel blends one way or another.
Now they face an abandonment of the policy of ever-higherblends of corn ethanol into the fuel mix in the name of keepingfuel cheap, ironically one of the original arguments for higherbiofuels mandates.
No doubt this summer's saga of spiking RINs prices and thepolicy quagmire engendered by the flawed assumptions of thelegislation underpinning the Renewable Fuels Standard will spuran effort within Congress to reform the system.
Any effort at change will likely trigger a colossal lobbyingeffort as the biofuels industry seeks to preserve its marketwhile the oil firms try to crush the upstart rival. This sort ofpolitical set-to is hardly fertile ground for a sensible energypolicy.
What's more likely to happen is either a cobbled-togethercompromise that pleases only entrenched interests or no reformwhatsoever that leaves the EPA with no choice but to rely onwaivers to mitigate the damage that would be caused by the RFS.
The real winners in this situation would be lawyers andlobbyists. No one else can plausibly say that there is a netbenefit for the United States from the endless fighting overethanol quotas, blending rules and pathways to compliance.
Yet there is a simple way out of this mess that cuts thelobbyists out of the equation. A simple requirement reserving acertain percentage of the fuel mixture for ethanol wouldstreamline enforcement and compliance and allow for sensiblelong-term planning by all sides in the industry.
Fixing the blending requirement at today's levels in volumeterms would ensure a smooth transition to the new regulatoryregime and minimize disruption in both the oil refining andbiofuels production industries.
Unfortunately achieving this sort of solution will requirepolitical leadership both from the Obama Administration as wellas the factions in the U.S. Congress that back various aspectsof the current regulatory regime. Does the will exist toovercome the poisonous atmosphere in Washington to fix thiserror or will a solution to the RFS become the latest victim ofdysfunction in the American capital?
BP (BP.)
