The Renewable Fuel Standard [part 1]

Environmental fallacy is defined as "the blunder of ignoring or not understanding the effects of the environment of a system."

This concept, popularized by American philosopher and systems scientist Charles West Churchman, demonstrates our rather innate tendency to allow our immediate and localized preoccupations to prevent us from seeing the long-term implications of our actions.

Examples of this fallacy are all around us. For instance, some of the best and brightest minds in the U.S. are currently working on social media focused Silicon Valley startups while industries that influence the quality of life for millions of Americans are left up to bureaucratic processes and determinations.

So, how does this theory relate to the oil and natural gas industry? The answer: The Renewable Fuel Standard.

What is the Renewable Fuel Standard?

Originated under the Energy Policy Act of 2005, the Renewable Fuel Standard (RFS) is a federal program enforced by the Environmental Protection Agency (EPA) which requires transportation fuels sold in the United States to contain a minimal volume of renewable fuel.

Every year, the program forces refineries to include higher amounts of biofuels – mainly ethanol derived from corn –into gasoline and diesel blends, from an established category of 9 billion gallons in 2008 to 36 billion gallons of renewable fuel in 2022.

Despite bi-partisan opposition and the adverse effects caused by this mandate, the EPA continues to impose and increase the burdens of this policy through additional proposals and amendments such as the infamous Tier 3 Vehicle Emission and Fuel Standards Program, which would actually do very little to improve air quality.

Higher Living Costs for Consumers

Consumer costs in the United States have been increasing month-over-month in 2013. Spiraling gasoline prices, which in 2012 accounted for the highest share of U.S. household income in over 30 years, are the primary reason for the elevated cost of living in the U.S.

Since 2006 - the year the RFS was passed by Congress – corn prices have soared by an alarming 275 percent due to the massive spike in demand for the valuable cash crop.

By increasing the demand for corn, the RFS has raised the prices for animal feed, which is the largest cost in raising chickens, turkeys, cows and hogs. This has increased the operational expenses of both food producers and retailers, forcing them to pass along the additional financial burdensto consumers.

Furthermore, despite the worst drought the United States has witnessed in 50 years, 40 percent of the nation’s corn was used to satisfy the renewable fuel standard in 2012.

This result has increased food prices on a global scale and cost the average American family of four to spend an extra $2,000 on groceries last year.

Considering the fact that the average U.S. household also spent $2,912 on gasoline last year, the adverse effects of the RFS mandate are a compounding issue.

Furthermore, with summertime fast approachingand the drought already reaching historic proportions, the need to change ethanol mandates are more evident than ever, especially when you consider the world food crisis.

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