April 16

April 16, 2020: Why are Governors asking for RVO waivers for their states? Doesn’t the amount of ethanol required fall as production does?

Historically, the biofuels community has reliably pushed back against any proposal that offers any form of RFS relief for small and independent refiners who lack the needed assets to blend their own fuel. Thus it comes as little surprise that today’s announcement that several state governors have requested renewable volume obligation (RVO) waivers have been met with outcries of doom from biofuels supporters. But the governors’ requests deserve to be taken seriously.

Here’s why.

While a decrease in gasoline consumption will decrease the physical amount of RINs refiners will need to buy, the RVO still requires 11.56% of the fuel supply to contain mandated biofuels. Before the COVID-19 crisis, that number was plainly unachievable given vehicle, engine and domestic production limitations, thus necessitating a reliance on foreign biofuel (what we like to call the foreign biofuels mandate, aka the real RFS). 

Under today’s conditions, this is even more unachievable. The cost of RFS compliance simply ends up draining cash from refiners that don’t currently have cash for operations given (real) demand destruction from plummeting motor fuel purchases. As AFPM’s Derrick Morgan told Bloomberg:

The waiver request isn’t a bid to take away biofuel’s share of the market, said Derrick Morgan, a senior vice president with the American Fuel and Petrochemical Manufacturers association.

“We’re just looking for compliance costs to get back in line, during this time of severe economic harm to the refining industry,” Morgan said. Even though refining production has been dramatically cut back, he said ethanol will continue to be 10% of the U.S. gasoline supply.

That last point is important—and is even acknowledged by stalwart agriculture supporters like economist Scott Irwin, whose concluded in a recent study that: “a sustained period of negative net values even larger than those of recent weeks will be required before ethanol loses its competitive position in the E10 gasoline blend.”  But meanwhile, refineries are bleeding cash.

The waivers are about reducing compliance costs. Refining margins are currently negative, and refineries barely have enough cash flow to support operations, let alone pay for RINs. Refiners can’t even pass the cost of crude in a negative margin environment, let alone pass any portion of the RIN cost along (which is not even fully passed through in a normal environment, despite what biofuels advocates claim from their perches somewhere in the Corn Belt or, for that matter, a luxury airline lounge at DCA). 

Meanwhile, gasoline demand is down 50 percent, but RIN costs are up over 300 percent. The trend is unsustainable, particularly when the same amount of ethanol will be blended regardless of the mandate. For refineries, it’s an entirely different story—which is to be expected when your business relies on free market competition rather than a guaranteed government safety net. The added cash drain from the RINs requirement simply expedites refinery closures, two of which have occurred already in North America (Gallop, NM, and Come-by-Chance, Newfoundland, Canada).

At the end of the day, failure to issue RVOs waiver will only compel further unsuccessful attempts to force a higher volume of higher priced foreign biofuel into the fuel supply—bankrolled by refineries that are struggling to stay viable.

Greatly reduced demand has placed refineries in harm’s way, and failure to adjust the RVO pushes refiners over the edge into severe economic harm. As the two recently closed refineries can attest, severe economic harm is more than a legal threshold—it’s a perilous situation that threatens the survival of critical energy infrastructure and places thousands of jobs in jeopardy.

Let’s hope EPA gives the governors’ requests the serious consideration they deserve.