CAFE, RFS Endanger Convenience Stores, Study Cautions

by Marlo Lewis on April 25, 2012

in Features

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Today, the National Association of Convenience Stores (NACS) published a study on the challenges facing the more than 120,000 U.S. convenience stores that sell motor fuel in a market increasingly shaped by the competing requirements of two federal programs: renewable fuel standard (RFS, a.k.a. the ethanol mandate) and corporate average fuel economy (CAFE).

I may have more to say about the study in a later post, but the skinny is that RFS and CAFE may whipsaw the retail fuel outlets upon which most of us depend to fill our tanks. CAFE will decrease the amount of fuel purchased and the frequency of consumer transactions at convenience stores, while the RFS will force convenience stores to make costly investments in storage tanks and blender pumps to sell increasing amounts and percentages of high-ethanol blends.

The excerpts below from NACS’s press release paint a disturbing picture on an industry caught in the regulatory cross hairs:

“RFS and CAFE policies cannot coexist without substantial changes in the retail and vehicle markets to accommodate significantly higher concentrations of renewable fuels, an unlikely scenario given that we may not even meet current requirements as they stand in 2012,” said John Eichberger, NACS vice president of government relations and the author of the new NACS whitepaper, The Future of Fuels: An Analysis of Future Energy Trends and Potential Retail Market Opportunities.

The Renewable Fuels Standard, revised by Congress as part of the Energy Independence and Security Act of 2007 (EISA), requires that increasing amounts of qualified renewable fuels be integrated into the motor fuels supply, culminating at a minimum of 36 billion gallons in 2022. This mandate was expected to increase renewables to approximately 20% to 25% of the overall gasoline market in 2022, about double the rate of 10.4% last year.

Meanwhile, in 2011 the Obama administration proposed new CAFE standards, which are expected to be finalized this summer, that seek to increase the average fleet fuel efficiency to an equivalent of 54.5 miles per gallon by 2025. The cumulative effect of the two mandates is that renewable fuels will be required to represent a significantly greater share of the market than originally anticipated — perhaps as much as 40%, or four times higher than today.

“This level of renewable fuels penetration in the market will impose significant economic burdens on the retail fuels market and consumers,” said Eichberger. “To meet such a high renewable fuels concentration, it is likely that most retailers in the country will have to replace their underground storage tank systems and fuel dispensers. For the convenience industry alone, this will require a minimum infrastructure investment that will add nearly $22 billion to the cost of retailing fuels.” [And where will they get the scratch, I wonder, with CAFE depressing motor fuel demand and sales?]

Even after this enormous infrastructure investment, it still may be impossible to satisfy the RFS, considering that only one in six consumers will drive vehicles capable of running on the mandated fuels. The U.S. Energy Information Administration (EIA) projects only 16% of on-road vehicles in 2022 will be flexible fuel vehicles.

“Unless something dramatic happens, we will hit the ‘blend wall’ within the next two years and will not be able to meet RFS requirements. This will trigger massive fines throughout the petroleum distribution system that will increase the cost to sell motor fuels,” said Eichberger.

An industry expert explains the problem to me as follows:

It’s all about the drop in demand caused by increased fuel economy running up against inflexible volumetric mandates and an infrastructure that can’t meet those targets.

In a 140 billion gallon gasoline market, the ”blend wall” (how much ethanol may be blended annually into the nation’s motor fuel supply) is 14 billion gallons (full market penetration of E10 — motor fuel made with 10% ethanol).

If CAFE drops demand to 100 billion gallons, the blend wall drops to 10 billion gallons of ethanol. But the RFS requires the sale of 36 billion gallons by 2022. To sell 36 billion gallons of ethanol and meet and the proposed CAFE standards, E-10 must be replaced with E-40 nationwide. However, pumps and storage tanks at most convenience stores, most cars, and nearly all outboard motors, lawn mowers, and other small engines can’t handle E-40.

The goals of the two programs — cut fuel consumption, expand ethanol consumption — conflict with each other.

Folks, your government’s left hand does not seem to know what its other left hand is doing. Honk if you think central planners can’t plan!

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