The federal government’s clunky imposition of the Renewable Fuel Standard

With US gasoline prices averaging nearly $4 per gallon, not many Americans would sympathize with what it has come to know as “Big Oil” industry when it complains about the regulatory mandates that it faces from Congress and the Obama administration. This includes the industry’s longstanding grievances about the government’s Renewable Fuel Standard, which requires refiners and other entities to blend increasing amounts of ethanol and other biofuels into US gasoline supplies.

But the way that the Obama administration is implementing the RFS is certainly giving oil companies and their allies something to complain about.

For starters, the administration is requiring 8.65 million gallons of advanced “cellulosic” ethanol to be blended into US fuel supplies this year, even though it acknowledges that the upstart cellulosic industry might fall short of that target due to project-finance problems and other woes.

The Environmental Protection Agency, which oversees the RFS, has admitted that its ambitious cellulosic ethanol target could create “uncertainty” for refiners and other segments of the oil industry that do much of the fuel blending. But EPA says it intends to “balance” that uncertainty with its “objective of prompting growth” in the fledgling cellulosic ethanol industry.

The American Petroleum Institute, the oil industry’s primary trade group, says that’s hogwash. API recently filed a federal lawsuit against EPA, calling the agency’s cellulosic ethanol target “unachievable” and “divorced from reality.”

API added that if the cellulosic ethanol industry does fall short of its 2012 production target, EPA would nevertheless force refiners “to purchase credits for cellulosic fuels that do not exist.” API’s lawsuit is pending in the US Court of Appeals for the District of Columbia Circuit.

Meanwhile, EPA is taking a hard line with two dozen refiners and other firms that unknowingly purchased nearly $50 million worth of bogus fuel credits for the biodiesel component of the RFS. EPA has accused two companies–Clean Green Fuels of Maryland, and Absolute Fuels of Texas–of selling the fake renewable identification numbers, or RINs.

But EPA has also issued “notices of violation” to ExxonMobil, Shell and 22 other companies that unwittingly used the fake RINs to comply with EPA’s renewable-fuel program. EPA threatened to fine the companies $37,500 per violation, per day, saying their “good-faith belief that the RINs were valid at the time they were acquired” does not absolve them of wrongdoing.

That’s too much for Representative Gene Green, a Texas Democrat who typically defends the Obama administration on policy matters. At a recent hearing on Capitol Hill, Green told EPA Administrator Lisa Jackson that “punishing the good-faith purchasers” of the fake RINs “may be a little over the top.”

But EPA is not backing down, advising refiners and other firms to investigate thoroughly before acquiring RINs from biodiesel producers.

And to that end, as Platts senior editor Meghan Gordon recently reported here, refiners are now hiring consultants to visit biofuel plants and comb through regulatory filings to ensure that their oil-industry clients are purchasing only legitimate RINs.  (Coverage of the RFS story on the attached Oilgram News starts toward the bottom and then jumps.)

“Six months ago, no one did this type of due diligence,” Beth Hilbourn of Turner, Mason & Company, a Dallas-based petroleum-industry consulting firm, told Platts earlier this month.

In regulatory documents and elsewhere, EPA has said that its renewable-fuels program is modeled on the principle of “buyer beware.”

EPA has certainly gotten the oil industry’s attention.

Platts