“It’s hard to believe that when Congress passed the Energy Independence and Security Act of 2007, a possible outcome was to reduce U.S. gasoline supplies and increase gasoline prices. However … that is exactly the potential outcome we find ourselves in today.”

That bizarre situation was outlined by William Klesse, chairman and CEO of refiner Valero Energy, during a valuable congressional hearing Tuesday.

Mr. Klesse was describing the looming problem of the ethanol “blend wall” caused by the biofuels mandates of the Renewable Fuels Standard (RFS), a provision of the 2007 law mentioned above.

Mandating the impossible

The blend wall is what industry calls the point at which the volume of renewable fuels mandated by the RFS exceeds the volume that can be practically blended into gasoline and diesel fuel.

Essentially, it’s a matter of not having enough gallons of gasoline in which to put all of the gallons of ethanol required by law. (For a good layman’s take on this complicated issue, read this March piece from The Economist.)

Refiners like Valero and ExxonMobil have several counterproductive compliance strategy options, including:

• Running higher ethanol blends in the motor fuels they produce.
• Reducing gasoline and diesel production.
• Exporting more gasoline and diesel for sale abroad.
• If available, buying Renewable Identification Numbers (RINs), which are credits refiners must have when marketing motor fuels containing ethanol. If they don’t comply, they can face substantial fines for each day they are out of compliance.

A plethora of problems

Each of these options, however, is highly problematic.

Almost all gasoline sold today already contains 10 percent ethanol. For over 90 percent of the vehicles on the road, automakers will not honor warranties if higher levels of ethanol are used because of the potential for engine damage. Moreover, the overwhelming majority of the retail infrastructure is not designed or certified for higher ethanol blends. So blending more ethanol is not an answer.

A policy that might force American refiners to cut production, meanwhile, would absurdly result in lower gasoline supplies for consumers. Nor does exporting gasoline or diesel solely to meet RFS requirements make economic sense, either.

And since RINs are only generated when biofuels are blended into gasoline, there don’t appear to be enough of those credits available to solve the problem.

The irony is that this is an entirely manufactured crisis. Washington created this problem. Will Washington fix it?