SHERMAN, Texas -- Our economy thrives on competition. Think up a way to make a better refrigerator and people will buy it. If your local pizzeria’s pies are greasy and overpriced, you can start up another place nearby that’s better. And so it goes in our free-market system: Businesses compete to make money, and consumers ultimately benefit. It’s a tried-and-true formula that, even through tough times, has still produced the world’s leading economy.
Now imagine that your small business sells retail gasoline and diesel. Your usual concerns involve location, nearby competitors and what kind of food or drink you offer inside your store. You watch the price of the gasoline you buy wholesale—the stuff that keeps the pumps full and the customers coming in. Your profit margin goes up or down a little depending on all of these factors, but in the end, you know you’re basically playing on the same field as the folks running a station across the street and those two blocks over.
This is the way it’s been for small gasoline retailers for generations. But in the past few years, our government has changed all that. The trigger was the Renewable Fuel Standard (RFS), an effort to lower imports, increase U.S. energy security and reduce greenhouse gases by requiring that a set amount of renewable fuels be blended into gasoline and diesel every year. Each year, the Environmental Protection Agency (EPA) raises the target: in 2010, it was about 13 billion gallons, in 2016 it rose to 18.1 billion gallons, and next year it will go higher still.
To keep track of how much renewable fuel is actually being blended, each and every gallon of it is given a 38-character tracking number, or credit, called a renewable identification number (RIN). These RINs can be used for compliance with the mandate or they can be sold for profit.
Now here’s where EPA decisions tilt the playing field against the small retailer. Currently, refiners and importers are obligated to demonstrate compliance with the program. Because these companies aren’t necessarily blenders, they need to buy RINs to comply. The blending is often done by big oil companies whose names you all know, as well as by large retail convenience-store chains that realized they can get in on the action.
These retailers have no obligation under the program to hit renewable targets. So instead of having to turn in their RINs to show the government how they’re complying, they’re free to sell them to refiners and importers unable to hit their constantly increasing targets. Given how much renewable fuel blending the government now requires, these RINs are now worth a lot of money.
That’s where guys like me lose out. If you’re an independent retailer, and not part of a big retail convenience-store chain with the resources to blend fuels at these big terminals, you gain nothing from the RIN market. Yet, my retail competitors who are part of those big chains now benefit from their parent company’s RIN-generated windfall—added revenue that can be used to undercut small competitors, open up more locations, you name it. Small retailers simply can’t come up with the huge capital needed to get in the fuel blending game, so we fall further behind. We’re operating in a rigged market, and we’re slowly getting squeezed out.
There’s one way to fix all this without spiking the whole program. To keep renewable fuels in circulation and safeguard the RIN market from opportunism, the government could use a more equitable approach for deciding who’s obligated to hit the EPA’s targets. The EPA could transfer “the point of obligation” to the rack where the renewable fuels are blended. That way, everyone operates under the same incentives, competition returns to the gasoline and diesel market, and consumers are protected.
To me, it is an issue of fairness. The EPA either levels the competitive playing field or smaller, independent service stations will gradually disappear. In a society that values competition, the choice should be obvious.
Bill Douglass is chairman and founder of Douglass Distributing, a small retail operation based in Sherman, Texas, and a former chair of NACS.