In Need of a Divorce

By Kolby Hoagland | April 18, 2014

Renewable volume obligations (RVOs), as set forth by the RFSII, establish annual volumes of biofuel that petroleum companies must mix into their fossil products or sell directly to consumers. The RVOs are calculated by considering the total volumes of gasoline and diesel in the U.S. market place, the ability of the respective biofuel industries to produce specific quantities, and the concentration of biofuel that regulators allow to be blended into gasoline and diesel. The last factor is particularly problematic for the corn ethanol industry. Known as the “blend wall”, no more than around 10 percent of total volume of gasoline sold in the U.S. may be displaced by corn ethanol. I could focus this blog on reasons why the blend wall was established and who it protects, but I’ll spare you the 45 minutes it would take to read. Instead, this week’s blog will look at RVOs and the blend wall in a modern context where the U.S. is using less transportation fuel.

At its peak, in 2007, the U.S. consumed 27.8 quadrillion Btu of petroleum in the transportation sector. Since then, the consumption of petroleum for transportation has been in decline. Recent analysis by public and private groups suggests that economic, demographic, technological, social, and environmental factors have influenced Americans to purchase more fuel efficient vehicles and drive less. The greatest influence to rapidly change consumption levels by the U.S. public is the price of fuel and relative state of the economy. In 2008, when fuel prices soared and the economy tanked, consumption across the board decreased rapidly. 

Petroleum Consumption

With the return of growth to the economy, one would think that consumption rates of transportation fuel would also grow, as has occurred historically over the last century. Yet, higher consumption rates have not returned as the economy has grown in the last five years. Since 2007, petroleum consumption has decreased by an average of 2.27% annually. Gasoline prices remain relatively high compared to historical averages, and consumers are wary of instability in price with erratic markets and geopolitical concerns tied to the price of oil. As a result, families and single drives are investing in higher fuel economy cars and reducing frivolous car trip. Furthermore, Corporate Average Fuel Economy (CAFE) standards are leading to the availability of more efficient vehicles.

Petroleum consumption rates are not likely to increase in the near or distant future, and this is a confounding predicament for the biofuels industry. With the RVOs for biofuels tied to consumption rates of petroleum, our policy makers have pitted biofuel producer at odds with those fighting for greater efficiency in transportation vehicles. In theory, those who are advocating for biofuels and fuel efficiency of vehicles are colleagues in the same fight to replace fossil fuel with more sustainable transportation options. The RVOs of the RFSII made sense at the time when they were established, but given that the nation has moved into a period where less fuel and less fuel is consumed on an annually, RVOs must be decoupled from petroleum volumes to allow the healthy growth of the biofuel industry.