The Broken RFS Allows the EPA To Pick Winners and Losers
“The RFS is doing for the super majors what the United States antitrust enforcement agencies would not let them do for themselves – destroying their competition. When merchant and small refiners can no longer compete, the super majors will be only too happy to snap them up or let them shut down.” Jack Lipinski, CEO of CVR Refining
The cost of credits to comply with the Renewable Fuel Standard (RFS) program now exceeds any other operating expense for many merchant refiners. And, because of a fundamental flaw in the RFS – the Blender Loophole – these compliance dollars aren’t being used to increase the use of renewable fuels, as the law intended. Instead, these profits are being pocketed by fuel blenders and the Big Oil and Big Retail companies that own them.
This should concern all Americans because this staggering transfer of wealth not only thwarts the goals of the RFS, it threatens our nation’s energy security by putting our country’s merchant refiners and small refiners, who produce roughly half of all gasoline and diesel sold in the U.S., at risk of going out of business. Ultimately, Americans pay the price for the EPA’s costly mandates on these refiners.
The unintended consequence of the broken RFS program is the creation of an unfair system that permits the EPA to pick winners and losers within the fuels industry, instead of allowing for marketplace competition that would reduce fuel costs for U.S. consumers. To add insult to injury, foreign-owned companies are benefitting from this unfair system. You can learn more about that here.
Below is a brief look at how this misguided system came to be, along with who wins and loses.
The Set Up – RFS Compliance and the Blender Loophole
Under the RFS program, when renewable fuel is blended with transportation fuel, the blender generates credits. These credits – commonly known as Renewable Identification Numbers (RINs) – prove to the EPA that an obligated party has either blended the required amount of renewable fuel into the transportation fuel supply or purchased credits from someone who has.
The EPA placed the point of obligation on refiners and importers – most of whom don’t actually control the blending process – rather than the parties that actually control blending: the owners of the fuels at the blending racks (referred to as blenders). Because most merchant refiners and small refiners do not blend the substantial majority of the fuel they produce, they are forced to buy RINs to comply with the RFS. The market for selling and purchasing RINs has little oversight, leaving sellers (some of whom, like Wall Street banks, have no relation to the industry) free to charge refiners and importers well above market-value.
By leaving blenders exempt, the EPA has placed the blending obligation on the parties least able to affect renewable fuel use. This has resulted in a giant loophole – the Blender Loophole – that is discouraging the increased use of biofuels while creating windfall profits for the exempt blenders. This the fundamental flaw of the RFS.
The Rub – A Cornered RIN Market
A significant portion of blending is done by Big Oil and Big Retail convenience store chains. Some of these companies are obligated to comply with the RFS. However, these companies also generate huge volumes of excess RINs because they have large, integrated retail networks where much of the blending occurs. These companies then sell their excess RINs to the smaller refiners and importers who need them.
Other companies in this group have no obligation to comply with the RFS, but will blend fuels to generate RINs, which they can sell in the open market. Both groups – obligated companies with excess RINs and non-obligated companies who generate RINs – sell RINs to obligated refiners (who can’t blend) at whatever price they choose. Ultimately, these big companies pocket the profits, rather than investing in infrastructure that will help increase the use of renewable fuels. This is in direct opposition to what the RFS is supposed to do.
Big Oil and Big Retail also sell their excess RINs to Wall Street banks, speculators and traders, who can hoard RINs to create a shortage and drive up the price. Learn more about this cornered market here.
Even with ample evidence to the contrary, the EPA claims that the RINs cost is in the crack spread. You have got to be joking. RIN prices move up and down independent of the crack spread. Take a look at the actual data here.
The Result – A System of Winners and Losers
RINs are worth a lot of money – BILLIONS, actually. The broken RFS program is responsible for forcing the transfer of more than $15 billion of wealth from merchant refiners and small refiners – the LOSERS – to Big Oil and Big Retail – the WINNERS.
Take a closer look at the Winners and Losers.
This uneven playing field has imposed on merchant refiners and small refiners a substantial economic disadvantage. They have been left at the mercy of unscrupulous sellers in the RINs market, preventing them from competing on a level playing field with Big Oil and Big Retail.
If the EPA allows these fraudulent, unfair practices to continue, this artificial market will lead to the shutdowns and bankruptcies of many merchant refiners and small refiners and retailers, and increase consolidation in the refining industry. Ultimately, this will drive up gas prices and harm consumers like you.
The EPA must close the Blender Loophole by making ALL BLENDERS responsible for complying with the RFS. If the blender loophole were closed, blenders would have both a legal obligation and a financial incentive to increase their use of renewable fuel – the same as refiners and importers – and the RFS would have a better chance of working as intended. This would benefit consumers, as well as the many companies involved in the program.