Common sense and political will could save thousands of Pennsylvania jobs
The oil industry is no stranger to unstable outlooks and volatile markets. The most recent shift in the oil market fueled a massive wave of job cuts in 2016, resulting in the loss of more than 195,000 jobs as oil prices crashed to record lows. Despite mandatory production cuts on oil producers, a rebounding market fueled a resurgence of jobs.
Along the historical timeline of the oil industry exists a series of warnings that show an impending decline. Now, the oil industry faces another harbinger of massive job loss once again. Southeast Pennsylvania alone is exposed to the potential loss of 10,000 well-paying jobs.
Common sense – combined with political will – are the only things that stand between what is an easily rectifiable problem or a major economic disaster.
In the southeastern most corner of Pennsylvania, in Trainer Borough, is the independent refinery of Monroe Energy. Monroe directly employs 500 full-time professionals, supports another 9,000 in southeast Pennsylvania, and supports a total of 30,000 across the United States. Jobs created by Monroe and independent refineries like it are in jeopardy of disappearing because elected officials, both Republican and Democrat, will not formulate a simple fix to federal regulation.
Background:
In 2005, the price of oil nearly doubled. This worried legislators, who went on to introduce the Energy Policy Act. The legislation included a new biofuel mandate called the Renewable Fuel Standard (RFS), which instructed fuel distributors to blend increasing amounts of ethanol prior to sale, a mandate that would be regulated through the Environmental Protection Agency (EPA).
Nearly 20 years later, the logistics to carry out the RFS remain complicated. As the Clear Energy Alliance explains, there are some fundamental problems with the mandate and how it’s regulated. For one, because of the corrosive nature of ethanol, blending must occur close to where the gas is sold to the consumer. Blending is often completed by the gas distributor, which may or may not be the refiner. This means that independent refiners are on the hook for demonstrating compliance with the federal biofuel mandate, even though they are not able to blend the biofuel themselves. Meanwhile, some of the largest refining companies in the world also have large ethanol operations, creating a system where the large oil conglomerates have an unfair advantage.
The EPA is required by law to verify that biofuels – such as ethanol – are being blended into gasoline regardless of how the resources are being moved around. The verification is completed using Renewable Identification Numbers (RINs), a unique identifier that is attached to every gallon of ethanol produced. A deeper look at the RIN system and how it affects the refining industry can be found here.
The RIN system is simply a compliance tool, requiring refiners to purchase credits to close the accounting loop, which proves that the appropriate amount of ethanol has been blended into the retail product. This is the process by which EPA verifies that the intent of the program is being met.
The problem is, there is no official exchange where RINs are bought and sold. It is a completely unregulated market. Trades are made out of view of the public and any regulators, making them susceptible to manipulation. The only database of the RIN accounting is reported confidentially after-the-fact to EPA in a system called EPA Moderated Transaction System or EMTS.
When the RFS program began, a RIN credit was only a few pennies, representing what the designers envisioned as the administrative costs of the program.. But as biofuel prices increased and other aspects of the program didn’t pan out as EPA predicted, RIN futures also increased. In the past several months, RINs have run as high as $2.00 or more, a 10,000 percent overall increase. The system should have remained simple, but instead is an inefficient and unregulated secondary market, which has locked refineries into a different pricing structure with no controls or transparency.
Problem:
The RIN market is extremely susceptible to manipulation, and the secondary markets are pushing the price of blending even higher, resulting in an overall increase in the price of gas. Wall Street traders and speculators are putting Monroe – including 10,000 Pennsylvania jobs – and independent refiners at risk.
Surprisingly, the other catalysts of increasing RIN costs are the ethanol producers themselves. Wall Street and the ethanol producers are controlling RINs as they are produced. There is no regulation that enables independent refiners to obtain equal access. This benefits market manipulators and ethanol producers alike, who know that refiners are required by law to purchase these RINs no matter the price. They know they can make money on the trade because refiners are mandated by law to purchase RINs regardless of the cost.
This RIN-based federal compliance scheme has led to unfair business practices and potentially illegal price fixing across our country’s own supply chain. But it was never intended to be used for speculation. So, why is it being permitted? The short answer is that Congress never foresaw the price manipulation of RINs.
Solution:
The solution is simple and can be implemented swiftly. EPA (or Congress) could allow refiners to purchase fixed and low-price government RINs if they are not able to obtain cost-effective RINs in the market. Even better, EPA (or Congress) could remove refiners from the equation altogether. And move the burden of compliance to the parties that control the mixing of biofuels in the first place – the blenders. This is where the physical transaction takes place, so it should also be where the RIN transaction takes place. The opaque market for RINs will still exist, but independent refiners and the tens-of-thousands of jobs they help to create will be better protected.
The long-term solution must bring the creation, sale, and disposition of RINs into light by creating an easily auditable platform of exchange that all industry stakeholders engage on – no price manipulation. A central platform for RIN creation and retirement would add greater transparency and efficiency to the system, which would lower the cost of each RIN to just pennies – to cover the administrative costs as Congress originally intended.
These are just a few of the solutions to avert a potential collapse in the oil industry and save thousands of jobs in our region. They just require common sense and political courage.
Pennsylvania’s economy has been ravaged by our 18-month COVID-19 battle. Nobody wants 10,000 more high-paying jobs vanishing and a massive increase to the cost of living. Though Pennsylvania’s state elected officials have been activated on this issue, unfortunately, this is a dilemma to be solved at the federal level.
Now, it’s up to Pennsylvania’s Congressional delegation to act.
