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RFS results in higher diesel and gasoline prices

Hydrocarbon Engineering,

The Congressional Budget Office (CBO) has found that unless the Renewable Fuel Standard (RFS) is repealed, the nation’s consumers can expect an increase in gasoline prices and diesel prices. These price rises are generally larger than the federal fuel tax of 18.4 cents/gal. for gasoline and 24.4 cents/gal. for diesel, and demonstrate how government mandates act just like taxes, according to the International Energy Agency (IEA).

In its analysis, CBO modeled three scenarios to determine the future impact of the RFS:

  1. The EISA volumes scenario: All requirements of the RFS are met in 2017, except for the requirement for cellulosic biofuels because sufficient capacity to produce the mandated levels of those fuels is unlikely by 2017.
  2. The 2014 volumes scenario: The EPA reduces the RFS mandated levels for the next several years to the amounts that it has proposed for 2014.
  3. The repeal scenario: Congress would immediately abolish the RFS.

CBO notes that in the EISA volume case fuel suppliers would need to meet the requirements using two types of advanced biofuels: biomass based diesel and sugarcane ethanol, requiring large production increases in both. An 100% increase in US production of biomass-based diesel and more than a 45% increase in Brazil’s production of sugarcane ethanol would be required.

Hence, fuel suppliers would have to use more than three times as many gal. of advanced biofuels, and they would have to add much more ethanol to gasoline than in a 10% blend.

CBO estimates that complying with the EIA volume scenario would have the following effects on diesel and gasoline prices in 2017:

  • The price of petroleum based diesel would increase by 30 cents to 51 cents/gal., an increase of 9% to 14% because the RFS requires the fuel suppliers to ensure that certain amounts of renewable fuels are used for each gal. of petroleum based fuel that they sell.
  • The price of E10 would increase by 13 cents to 26 cents/gal., an increase of 4 to 9%.

Higher food prices

CBO estimates that corn ethanol use in 2017 would be approximately 15% (2 billion gal.) higher resulting in an increase in the average price of corn of approximately 6%. The IEA anticipates that this would increase total US spending on food by approximately 0.25%.

According to the National Corn Growers Association and the US Department of Agriculture, approximately 40% of the US corn crop, 4.4 billion bushels, went to feed livestock in 2012. In comparison, approximately 31%, 3.5 billion bushels were used in ethanol production.

Since the RFS was enacted, chicken farmers have incurred more than US$ 44 billion in higher feed costs. Adding together the higher cumulative feed costs for chicken, turkey, eggs and hogs, it totals nearly US$ 100 billion in additional feed costs. According to the IEA, spreading the US$ 100 billion over the 85.4 billion gal. of ethanol produced from the corn that would otherwise have been used for feed results in livestock producers subsidizing ethanol by over US$ 1.00/gal.

Wholesale prices for beef have risen 47%, dairy by 23% and eggs by 70% since the introduction of the RFS. According to a study by Pwc, these food increases have increased total costs for full-service restaurants by US$ 691 million (approximately 9%). As corn is used in 75% of all grocery store items, it is estimated that the average US family of four paid US$ 2000 more for groceries in 2012.

Adapted from a report by Emma McAleavey.

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