WASHINGTON -- President Donald Trump campaigned on a promise to tackle regulatory burdens on business and shift the competitive advantage toward the United States. When it comes to energy and fuels, the implications are massive.
CSP Fuels spoke with Peter Cohn, an energy research analyst and financial adviser for Height Securities LLC, Washington, D.C., about what to expect from the Trump administration on issues affecting the fueling industry. What follows are his predictions on several key areas that shape the gasoline business, from regulations to taxation.
In late January, Trump issued an executive order directing federal agencies to find two regulations to cut for every new regulation introduced. How could this affect the Environmental Protection Agency (EPA)—the agency with the greatest influence of fuel retail?
For one, it would not affect actions that the EPA is required to do by law—for example, release annual renewable volume obligations (RVO) under the Renewable Fuel Standard (RFS). Cohn considers the executive order more of “a gimmick” Trump is using to demonstrate that he is following through on campaign promises to deregulate and prevent new restrictions on business.
But he still could actively work to reduce regulations. The Trump administration “has made it really clear that they’re not interested in regulating for the sake of regulating,” said Cohn. “In fact, the first six months of the year will be dominated by repealing old regulations.”
Do not expect any significant changes to RVOs with Scott Pruitt as administrator of the EPA, said Cohn. For one, the former attorney general of Oklahoma was “run through the ringer” during his confirmation hearings by legislators representing corn-belt states, who demanded his reassurance on the administration’s support of ethanol.
“He had to make a lot of promises to Midwest senators in exchange for their votes on confirmation,” said Cohn.
That said, Pruitt would likely resist a big increase in biofuel blending mandates or offering a Reid Vapor Pressure (RVP) waiver for E15. “But I don’t see him dramatically revising downward the RFS blending targets,” said Cohn. “At best for fuel marketers and retailers, we’ll see a freeze if slight, incremental growth” in blending volumes.
The RFS’ current blending target for conventional, corn-based ethanol at 15 billion gallons will likely remain in place, barring action by Congress, said Cohn.
“And Congress is hopelessly divided on this issue,” he said, adding that legislation aiming to cap ethanol content at 9.7% will likely not make it out of the House, let alone the Senate, because of a lack of votes.
“You will see hearings and a lot of noise on this topic, but ultimately the action will be concentrated in Pruitt’s hands,” said Cohn.
Moving the point of obligation
Last week, news broke that the Trump administration was considering whether to support a plan to shift the point of obligation—the party responsible for meeting biofuel blending quotas under the RFS—from refiners and importers to fuel blenders. The plan, reportedly the result of an agreement between Trump’s special regulatory adviser and RFS critic Carl Icahn and the Renewable Fuels Association, was widely condemned by biofuel and fuel retail groups, as well as the American Petroleum Institute (API).
“The pushback may make the Administration take another look at all the possibilities, and now that it appears the House Energy & Commerce Committee wants to make a serious run at RFS reform, [the] EPA might want to see how things start to shape up,” said Cohn. “When faced with a tough decision, the easiest thing for an agency to do is punt to Congress.”
He still believes a shift in the point of obligation is likely, “even though the leak last week threw things into a bit of a tailspin.” But, Cohn believes petitioners led by Valero Energy and Icahn’s CVR Refining have successfully made their case that they should not be obligated under the RFS because they do not come into enough contact with biofuels to control the blending decision.
“There is clearly a view that something has to give, and soon, and our belief continues to be cutting RFS volumes is a less viable option given that is one thing the biofuels community is united against,” he said.
A recent downward trend in prices of renewable identification numbers (RINs), which relieves some pressure on refiners in the short term, may actually buy the EPA more time to consider its options.
A potential path
It is unlikely the EPA under Pruitt would reach a final decision on moving the point of obligation until late 2017, Cohn said. More likely, it would announce it around the same time as final RVOs for 2018, meaning it probably would not take effect until at least the 2018 compliance year.
One way it could play out: The EPA would put out an advance notice of proposed rulemaking in which it suggests three to four possible options for moving the point of obligation, including a proposed transition period for phasing in the changes. Then in 2019 or 2020, the shift in the point of obligation could take effect.
“They sort of cover themselves politically that way—they’re not coming out hard and fast for one particular policy option,” said Cohn. This would also put additional downward pressure on RIN prices.
“We do have better than even odds that the Pruitt EPA will ultimately move in that direction. I think you’ll see advance notice of rulemaking coming out sometime this spring,” said Cohn.
One of Trump’s key campaign promises has been higher infrastructure spending. While Republican leadership seems largely unenthusiastic about a big infrastructure bill, “Trump won the argument that it will be considered by this Congress, so really, it’s a question of timing and scope,” said Cohn.
Raising the federal gasoline and diesel tax is not likely to happen, he expects. “This does not seem to be the type of political leadership interested in directly raising taxes on consumers,” said Cohn.
What else is unlikely: wider tolling of interstates, which much of Congress also views as a tax, said Cohn. In areas where tolling is currently allowed, there could be an expansion of incentives on public/private partnerships. And, the new infrastructure bank that Trump has proposed could also get traction.
But a final infrastructure bill will likely be much smaller than the trillion-dollar estimate floated by Trump; instead, expect something maybe one-quarter of that size, said Cohn.
“We’re going to see something positive on infrastructure, but it’s unlikely to be the end-all-be-all, ‘We’re going to make American infrastructure the best in the world overnight,’ ” Cohn said.
To pay for one of Trump’s campaign promises—to build a border wall between the United States and Mexico—proponents in Congress have settled on imposing a 20% tax on imports, including crude oil. While some cost estimates suggest a border tax could hike retail gasoline prices by around 20 cents per gallon, Cohn said it is difficult to determine what the real figure would be.
“One thing we hear consistently is the dollar will appreciate as result of border adjustment; that will ultimately make it cheaper to bring in product from abroad, which might counterbalance the effect of the border adjustment,” said Cohn.
He expects the House to pass a border-tax bill that will not have an exemption for oil, but it would phase in slowly—perhaps over four to five years—to give refiners time to adjust their crude mix and see if it would be more cost effective to use domestic sources. But he does not believe it will ultimately get signed into law because of the opposition from not only the oil industry but also those with large exposure to imports—including the retail and apparel industries.
“We’ve told clients we think there’s no better than a 30% chance it ultimately becomes law,” said Cohn, noting there will be some “overhang” on the refinery sector for the next several months until the legislative push plays out.