Ethanol discussed at Senate oversight hearing on high gas prices

By Erin Voegele | July 17, 2013

On July 16, the U.S. Senate Committee on Energy and Natural Resources held a full committee oversight hearing on gasoline and fuel prices. While the committee noted that the hearing aimed to focus on how prices are being impacted by the current boom in domestic oil production and the restructuring of the U.S. refining industry and distribution system, those testifying also addressed ethanol.

Chris Plaushin, director of federal relations at the American Automobile Association, did not specifically mention ethanol in his written testimony, but did say alternative fuels will play a role in reducing the volatility of fuel prices. He also that a range of factors can impact the price of gas at the pump. These include local disruptions in distribution or weather, as well as global disturbances related to violent in the Middle East or economic growth in China. “They also range from the expected – seasonal demand increases, product shifts or rising global demand – to the unexpected – hurricanes, refinery outages or geopolitical tensions,” Plaushin said. “The result of these myriad factors is a “new normal” where the days of a national pump price below $3.00 is likely a thing of the past and state and regional price spikes that see retail prices move violently in a span of days are more common.”

According to Plaushin, there is no silver bullet solution to high gasoline prices or market volatility. “Rather it will take a portfolio of polices to best mitigate the periodic uncertainty of gas prices and their impact on consumers,” he said. “The federal government should adopt a national energy policy, which combines increased production, the efficient use of traditional and alternative fuels, and the elimination of lengthy roadblocks to the development of new sources of energy – so long as we are not precluding the appropriate level of environmental review.”

William Klesse, CEO and chairman of the board of Valero Energy Corp., addressed the renewable fuels standard (RFS) in his testimony, blaming it—in part—for increased prices. “One of the most challenging factors facing he fuels market place is the implementation of the federal renewable fuels standard,” he said in written testimony. “As a company, Valero has met the challenge of the RFS by becoming a market leader in the production of alternative transportation fuels,” Klesse continued, noting Valero is currently the third largest corn ethanol producer in the U.S.

Klesse expressed concern over the way the RFS is currently implemented, specifically that refiners and importers—but not blenders—are required to demonstrate compliance with renewable identification numbers (RINs). He also said that the revised RFS program in 2007 along with lower than expected gasoline demand has resulting in RINs becoming “a huge cost and fairness issue.” Klesse also pointed allegations of fraud made in the RIN market over the past two years.

“At Valero alone, we anticipate cost increases of some $500 to $750 million this year just as a result of volatility in the market for RINs,” Klesse said, adding that at the outset of the RFS the U.S. EPA said in its regulatory preamble that the cost of RINs would be negligible. “This estimate has turned out to be profoundly incorrect as the program approaches an infeasible situation, expected in 2014,” he continued.

Klesse also addressed E15 in his testimony. While he said “Valero support ethanol and is a leading producer,” he stressed that he doesn’t think that greater reliance on higher ethanol blends is the way to go.

Dan Gilligan, president of the Petroleum Marketers Association of America, also addressed the RFS, RINs and E15 in his testimony. “Lately, the value of ethanol credits have increased in value and a number of factors play into this recent rise. As the ethanol blendwall approaches due to the barriers of E15, RIN values have skyrocketed because obligated parties are buying all of the available RINs to comply with the law,” he said. “Eventually, refiners could resort to exporting gasoline or cutting back production to fall within the parameters of the RFS blending mandate, so they don’t violate the law. Actions like this could lead to rack price chaos unless EPA lowers the corn-based ethanol mandate which PMAA supports lowering the level achievable with an E10 blend and reasonable growth for E85.”

Prior to the hearing, Fuels America issued a preemptive response predicting the oil industry would attempt to scapegoat the RFS and RINs for high gas prices. “Congress needs to know the truth: renewable fuel is reducing, not increasing, gas prices for consumers. And, despite what oil industry representatives say, recent polling shows that 80 percent of Americans want more renewable fuel in our fuel mix,” said the group in a statement.

“As long as Big Oil maintains its monopoly over our transportation fuel supply, Americans will be powerless against volatile gas prices. Fortunately, renewable fuel can provide both near-term savings and long-term benefits. Renewable fuel has already displaced 462 million barrels of imported crude oil in 2012 and is poised to contribute even more,” Fuels America continued. “It is imperative for Congress to maintain the RFS. This policy is working, as intended, to drive investment, create jobs, and most importantly – create a competitive market for oil alternatives in our transportation fuel sector, resulting in consumer savings and choice at the pump, increased national energy security, and emissions reductions.”

Additional information on the hearing, including full written testimony from witnesses representing the U.S. Energy Information Administration, Continental Resources Inc., Valero, the PMAA, AAA and Citigroup Inc., can be accessed on the Senate Committee on Energy and Natural Resources website.