Data Dispel the Myth of the Blend Wall

Source: By Brent Erickson, Inside Sources • Posted: Tuesday, October 18, 2016

Washington policymakers tend to accept without question that U.S. refiners are incapable of blending ethanol into gasoline above concentrations of 10 percent, due to the so-called blend wall. Oil refiners are pressuring their allies in Congress to change the Renewable Fuel Standard (RFS) in order to address the blend wall, predicting catastrophic market consequences if they don’t get their way.

But conventional wisdom about the blend wall is demonstrably wrong. Data recently released by EPA disprove the widely held assumption that reaching and exceeding the blend wall triggered volatility in the market for RFS compliance credits, known as RINs. This newly available data should give lawmakers plenty of reason to rethink changing the RFS.

Back in 2012, researchers at the University of Missouri and other Midwest universities predicted that RIN prices would rise sharply when U.S. fuel refiners hit the blend wall. According to their relatively straightforward economic theory, the blend wall would cause a shortage in available RINs because refiners could not put more than 10 percent ethanol into gasoline; the shortage would in turn cause RIN prices to rise.

The researchers sought to understand why RIN prices failed to rise in 2012, given estimated constraints on biofuel supplies in comparison to RFS requirements that year. When RIN prices rose in 2013, everyone assumed the blend wall was the cause — but that’s simply circular logic. Washington policymakers ended up disrupting and delaying implementation of the RFS, which ended up delaying the collection of data showing that there was no shortage of RINs as had been predicted.

Now, the EPA has finally released the data on obligated parties’ reported fuel use and use of RINs to satisfy annual obligations from 2010 through 2013 (the latest year for which refiners have fully demonstrated annual compliance). The numbers indicate that obligated parties reached the blend wall as early as 2010 and definitely breached it by 2012.

The explanation is simple and often overlooked in economic analyses of the RFS program: small refiners and small refineries (even those owned by large refiners) were exempt from the RFS through 2012. The remaining obligated refineries were nevertheless able to blend ethanol into the obligated volumes of gasoline at a rate exceeding 10 percent or to obtain needed RINs at low cost. Moreover, the data reveal that despite having reached the blend wall by 2010, obligated parties continued to accumulate excess RINs to carry over for future compliance years.

One faction of the oil industry is currently working Capitol Hill, trying to win last-minute passage of a bill that would cap the RFS below 10 percent of gasoline volumes. This cap is demonstrably unnecessary — obligated parties were able to exceed the blend wall as early as 2010.

At the same time, another faction of oil refiners is working Capitol Hill, trying to get a brand-new exemption from the RFS for themselves. Notably, the first faction of oil producers opposes this new exemption. Congress should reject both groups’ requests for special favors, primarily because they are aimed at solving a blend wall problem that doesn’t (and never did) exist.

Similarly, EPA should reconsider its proposed rule for the 2017 RFS volumes, which is due to be finalized by the end of November. The agency’s program changes along with its two-year delay in issuing previous rules were based on the myth that the blend wall was the cause of high RIN prices. Rather than further changes and delays, EPA should work instead to get this vital program back on track and continue tearing down this fictional wall.

Brent Erickson is executive vice president of the Industrial & Environmental Section at Biotechnology Innovation Organization in Washington.