EPA: Thou Shalt Purchase Fuel That Doesn't Exist

"Well, here's another nice mess you've gotten me into!" said Oliver Hardy to Stan Laurel in The Laurel-Hardy Murder Case, a 28-minute movie made in 1930.  The phrase is usually misquoted as "Here's another fine mess you've gotten me into."  Either way, it means falling into an unavoidable problem.

What, you ask, does a Laurel and Hardy movie made in 1930 have to do with today's Environmental Protection Agency (EPA)?  Directly, nothing, but indirectly, everything.  You see, the phrase "Well, here's another nice mess you've gotten me into!" pretty well sums up EPA director Lisa Jackson's decision to enforce the EPA rule that mandates that oil refiners blend cellulosic ethanol into gasoline, diesel, and jet fuel, among other products.

The nice (or fine) mess?  Cellulosic ethanol does not exist commercially!  It exists in small quantities in labs, but there is simply no way for oil refiners to honor the EPA mandate.  But did that little problem cause Jackson to change her decision?  Nooooo, to quote John Belushi on SNL.

The EPA fined refiners a $6.8-million penalty for not following its edict.  The American Petroleum Institute (API) and the American Fuel and Petrochemical Manufacturers (AFPM) in February 2011, and, in January 2012, appealed the fine and asked Jackson to review her decision.  She refused to reverse her decision, then had the gall (and bad taste) to close her refusal letter with "We thank you for your interest in these issues."

"EPA's decision is arbitrary and capricious. We fail to understand how EPA can maintain a requirement to purchase a type of fuel that simply doesn't exist," said Charles Drevna, president of AFPM.

That $6.8-million fine, if oil companies are doing their job (and they had better, since I am a stock holder), will be passed on to consumers -- that's you and me.  So, ultimately, we will pay $6.8 million to the EPA because of Jackson's stupidity.

President George W. Bush, in 2006, said, "Our goal is to make this new kind of ethanol [cellulosic ethanol] practical and competitive within six years."  He signed, in 2007, the Energy Independence and Security Act (EISA).  Within EISA is the Renewable Fuel Standard (RFS) that mandated that refiners blend 6.6 million gallons of cellulosic ethanol in 2011, and 8.65 million gallons in 2012.  And the EPA mandate is only going to increase (see Figure 1 on page 5).

How is the production of Cellulosic Biofuel and Cellulosic Diesel going?  Well, look at the table at the bottom of the EPA pages for EPA Moderated Transaction System (EMTS) for 2011 and 2012.  Absolutely zero gallons were produced, either domestically or by foreigners.  I guess Lisa Jackson, being too busy imposing fines, could not find time to read these pages.

President Bush, and then President Obama, provided $1.5 billion in grants and loan guarantees for the manufacture of cellulosic ethanol, ethanol produced from non-food or livestock feed products.  POET, the world's largest ethanol producer, received a $105-million loan guarantee.  Abengoa Energy (a Spanish company, no less) got a $134-million loan to build a cellulosic factory in Kansas.  Abengoa says its Hugoton, Kansas plant is expected to begin operations in June 2013.  But back in 2010, Cello Energy Corporation of Bay Minette, Alabama was supposed to produce 70 million gallons of cellulosic ethanol.  Cello received $12.5 million from Vinod Khosla's Khosla Ventures.  Cello went bankrupt in October 2010 and supplied not one drop of cellulosic ethanol.

And it's not from lack of warning that the EPA has gotten us into this nice mess.  Cello's estimate of 70 million gallons was reduced to 5 million gallons -- not an insignificant drop.  The EPA, in 2010, was banking on Cello Energy to provide a significant amount of cellulosic ethanol that the EPA thought would be produced in the U.S. in 2011.  In March 2010, the EPA found that five U.S. companies would be able to produce only 6 million gallons of ethanol.  But none of them did.

The EPA writes into all its rules: "Announcements of new projects, changes in project plans, project delays, and cancellations occur with great regularity." 

Now please tell me how any company, let alone an oil company, can do any planning when faced with that uncertainty.  The EPA rules certainly don't affect it, since it is a government agency, does not have to make a profit, and has to do no planning.  But that uncertainty is not so good for the "private sector" that Obama says is doing fine.

On June 11, 2012, AFPM and Western States Petroleum Association (WSPA) sued the EPA in the Washington, D.C. Circuit Court, requesting relief from the EPA ruling.  AFPM General Counsel Rich Moskowitz said:

Congress gave EPA authority to waive RFS requirements when there is an inadequate supply of domestic biofuel.  If EPA isn't going to exercise this authority in a year when zero gallons were produced and available, when would EPA use this waiver provision?  EPA's waiver denial is contrary to Congress's intent.  It forces refiners to purchase credits from EPA for cellulosic fuels that are not commercially available and amounts to a hidden fuel tax on consumers.

Bottom line: American oil refiners must spend money to sue the federal government for relief from some unobservable and very stupid rules rather than focus on creating jobs.  Other businesses see all of this going on and wonder if any moves they make will be met with similar EPA rulings.  It's no wonder that most businesses are in a "holding pattern" until the results of the 2012 election are known.

Dr. Beatty earned a Ph.D. in quantitative management and statistics from Florida State University.  He was a (very conservative) professor of quantitative management specializing in using statistics to assist/support decision-making. He has been a consultant to many small businesses and is now retired.  Dr. Beatty is a veteran who served in the U.S. Army for 22 years.  He blogs at rwno.limewebs.com.