[Congressional Record Volume 145, Number 56 (Thursday, April 22, 1999)]
[Senate]
[Pages S4105-S4107]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
MTBE IMPORTS AFFECT U.S. ENERGY SECURITY
Mr. DASCHLE. Mr. President, we are approaching the tenth anniversary
of the birth of the reformulated gasoline (RFG) program. This
initiative, enacted in 1990 as part of the Clean Air Act Amendments,
established strict fuel quality standards for the nation's most
polluted cities in order to reduce air pollution. It includes a minimum
oxygen content requirement, which was intended to provide an
opportunity for America to reduce its dependence on foreign oil through
the use of domestically produced ethanol and MTBE.
Reformulated gasoline was introduced in the American marketplace in
1995. Today it accounts for approximately one-third of all gasoline
sold in this country.
Congress had several objectives in establishing the RFG program: (1)
to substantially reduce harmful air pollutants caused by fuel-related
emissions, especially ground level ozone and air toxics; (2) to reduce
imports of crude oil and petroleum products, especially those from
unstable regions like the Middle East; and (3) to stimulate investment
in domestic ethanol and ether plants, thus creating jobs and adding
value to grains and other domestic raw materials.
The first objective has been not only met, it has been exceeded. In
fact, EPA Administrator Carol Browner has called the RFG program ``the
most successful air pollution reduction program since the phase-out of
lead in gasoline.'' The other two objectives also have been met, though
not to the extent that many of us had hoped.
A major impediment to full realization of the potential of the RFG
program has been the importation of massive volumes of MTBE, much of it
subsidized by the Saudi Arabian government, into the United States.
Domestic ethanol and MTBE producers have been harmed, and American
plants have not been built, largely due to the influx of subsidized
product from offshore that makes potential investors unwilling to
commit capital to U.S. ethanol and ether plants.
The winners in this situation are the Saudi government and a few
multi-national corporations. The losers are U.S. corn farmers, butane
suppliers and plant workers as well as American consumers who remain
potential hostages to foreign energy suppliers.
Mr. President, the benefits of the RFG program have been substantial.
However, as we prepare to enter Phase II of the program, it is
incumbent upon policymakers to reflect upon whether it is achieving its
potential in terms of air quality improvements and oil import
reductions.
It seems clear that the answer to the first question is ``yes.'' RFG
is generating substantial air quality benefits and even exceeding the
predictions that many had made when the original rules were written.
The answer to the second question, however, is a resounding ``no.''
Imports of Saudi Arabian MTBE are growing, and the exclusionary effect
of unfairly traded MTBE imports on ethanol usage in key markets such as
California has become increasingly problematic.
On April 1, 1999, the International Trade Commission (ITC) held a
public hearing on its Investigation No. 332-404, concerning MTBE
imports and their impact on the domestic oxygenate industry. This
inquiry is timely and important. It will cut through the rhetoric,
provide policymakers with a clear picture of the nature and effect of
MTBE imports on domestic production and U.S. energy security, and set a
factual foundation for discussion of what, if anything, should be done
about this situation.
With those objectives in mind, I commend to my colleagues attention
the testimony presented before the ITC by Bob Dinneen, Legislative
Director of the Renewable Fuels Association, and Todd Sneller,
Executive Director of the Nebraska Ethanol Board, that underscores the
damage that has been done by unfairly traded MTBE imports. Mr. Dinneen
and Mr. Sneller present cogent analyses of the impact that increasing
volumes of heavily subsidized MTBE are having on the domestic
oxygenates industry. Their testimony should be a warning to us all.
I ask unanimous consent that the testimony of Mr. Dinneen and Mr.
Sneller be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Testimony of Bob Dinneen, Legislative Director, Renewable Fuels
Association
Mr. Chairman and members of the Commission, on behalf of
the members of the Renewable Fuels Association, the national
trade association for the domestic ethanol industry, I want
to thank you for the opportunity to provide comments today on
the Commission's investigation of MTBE. Ethanol and MTBE are
competitive additives to gasoline that increase octane and
oxygen to
[[Page S4106]]
fuels, resulting in dramatically reduced emissions. As such,
the domestic ethanol industry is directly and negatively
impacted by the importation of subsidized MTBE, and we
commend the Commission's decision to investigate this issue.
Ethanol is a renewable fuel produced from corn and other
agricultural feedstocks. Today, ethanol is the third largest
user of corn, behind only feed and export markets. Virtually
all ethanol consumed in the U.S. is produced domestically.
Last year, the U.S. ethanol industry processed approximately
560 million bushels of grain into 1.4 billion gallons of fuel
ethanol at 53 plants located in 20 states. A report completed
for the Midwestern Governors' Conference, The Economic Impact
of the Demand for Ethanol, concludes that the ethanol
industry: increases net farm income more than $4.5 billion;
boosts total employment by 195,000 jobs; improves the balance
of trade over $2 billion; adds over $450 million to state tax
receipts; and results in a net savings to the Federal budget
of more than $3.5 billion.
Background: Since the twin oil supply shortages and price
shocks of the 1970's, promoting increased energy security has
been a national priority. Toward that end, beginning with the
National Energy Security Act of 1979, the Congress has worked
to stimulate the production and use of domestically-produced
alternative fuels. As noted by the U.S. Senate Committee on
Energy and Natural Resources:
``Increased dependence on oil imports means, inevitably,
increased dependence on the nations of the Persian Gulf. The
potential for economic disruption and war in the event of
interruptions in Persian Gulf supplies will increase...
``If the projected United States dependence on Persian Gulf
oil materializes, not only will the probability of economic
disruption and war increase, but policies available to the
United States to deal with political turmoil in the world,
including the Mideast, will be affected.''--S. Rep. No. 72,
102nd Cong., 1st Sess. at p. 204.
In 1990, the Congress extended its commitment to the
development of domestic energy resources by passing the
Daschle/Dole amendment to the Clean Air Act requiring
refiners to add certain levels of oxygen to new reformulated
gasolines. A critical rationale for the oxygen requirement
was the energy security benefits attributable to the
increased use of ethanol and other domestically-produced
oxygenates. At the time, more than 400,000 troops were
stationed in the Persian Gulf, in large part to protect the
free flow of oil from the Mideast. The U.S. Environmental
Protection Agency estimated the oxygen requirements of the
Clean Air Act would reduce energy imports by 500,000 to
800,000 barrels per day. Consider these statements by
proponents of the RFG program:
``I support this amendment because it will reduce the toxic
aromatics currently used to boost octane in gasoline; it will
reduce ozone-forming automobile emissions; it will begin to
reduce our dependence on imported oil; and it will enhance
rural and farm economies. [136 Cong. Rec. S3522 (Statement of
Senator Kent Conrad)(daily ed. March 29, 1990)]
``The second thing we ought to recognize is this is the
only part of the bill that helps our extraordinary dependence
on imported oil.'' [136 Cong. Rec. S3519 (Statement of
Senator Tim Wirth)(daily ed. March 29, 1990)]
But the promise of increased market opportunities for
ethanol in the RFG program has been undermined by the
unanticipated and rising levels, of MTBE imports. EPA data
shows that despite the intention that ethanol market
opportunities be significantly expanded in RFG, ethanol has
actually garnered just 12% of the RFG market, primarily in
Chicago and Milwaukee. In coastal RFG markets where MTBE is
readily imported, ethanol has virtually no market
penetration.
At the same time, the RFG program has proven a boon to
imported MTBE. MTBE imports have risen from just 30 million
gallons in 1990 to more than 1.4 billion gallons in 1998.
Moreover, the majority of MTBE imports are from Saudi Arabia
and other OPEC countries. In 1997, 70% of U.S. imports of
MTBE came from Saudi Arabia and other OPEC countries. Imports
now represent a third of U.S. MTBE consumption, and is
roughly equal to U.S. merchant production.
To respond to these alarming levels of MTBE imports,
particularly from Saudi Arabia Senate Democratic Leader Tom
Daschle (SD) has introduced legislation that would require
the Commerce Department to investigate, under Section 702 of
the Tariff Act of 1930, whether Saudi Arabia has provided
unfair subsidies to its exporters of MTBE, giving them an
unfair market advantage in the U.S. oxygenate market. If it
is determined to be so, S. 2391 would impose an import fee
large enough to offset the subsidiaries. The RFA supporters
S. 2391, as MTBE imports have increased U.S. dependence on
foreign supplies at the expense of domestic oxygenate
producers.
The following is a break-down of 1998 MTBE production and
imports:
1998 MTBE PRODUCTION
------------------------------------------------------------------------
Annual gals
Source Production b/d (billion)
------------------------------------------------------------------------
Merchant Plants.................... 103,000 b/d...... 1.5
Captive Plants \1\................. 102,000 b/d...... 1.5
Imports............................ 90,000 b/d 1.4
Total........................ 295,000 b/d...... 4.4
------------------------------------------------------------------------
\1\ A captive plant refers to MTBE produced at refineries, used by those
refineries for octane trimming and is not available for merchant
oxygenate or octane markets.
Source: Energy Information Administration.
In the absence of such precipitous MTBE import level, the
domestic ethanol industry would have been able to double in
size--creating more domestic jobs, providing increased rural
economic development and further enhancing our balance of
trade.
MTBE Duty Rates
An important issue for the Commission to consider is the
variable duty rates paid on MTBE. There are currently three
classifications of the Harmonized Tariff Schedule (HTS) under
which MTBE may be imported: as a motor fuel (2710.00.15); as
MTBE (2909.19.14); or as a gasoline additive (3811.90.00).
Each classification has a different duty rate. Current HTS
duty rates for each classification are as follows:
------------------------------------------------------------------------
HTS
Product classification General rate of duty
------------------------------------------------------------------------
Motor Fuel (RFG).............. 2710.00.15 52.5 cents/bb1 (1,25
cents/gal).
MTBE.......................... 2909.19.14 5.5% ad valorem
(approx. 5 cents/
gal).
Gasoline Additives............ 3811.90.00 2.2 cents/kg & 10.8%
ad valorem (approx.
11.6 cents/gal) \1\.
------------------------------------------------------------------------
\1\ Assumes $0.90 cost and .74 kg. weight of MTBE.
It is becoming clear the MTBE is increasingly being
imported under the HTS classification for motor fuel.
According to the Energy Information Administration, 66,000 b/
d of MTBE was imported last year. But an additional 24,000 b/
d of MTBE was imported in finished RFG. (Assumes MTBE at 11%
by volume to meet federal 2.0 wt.% oxygen requirement in
RFG.) This compares to 74,000 b/d as MTBE and 18,000 b/d as
RFG in 1997. Thus, the trend is to import more MTBE as
finished RFG, and pay the reduced duty. Moreover, according
to DeWitt & Company, an MTBE industry trade publication and
research group, the actual amount of MTBE imported in
finished gasoline could be much higher. That is possible
because importers could overblend MTBE for shipment and blend
down to meet U.S. RFG oxygen specifications at the gasoline
terminal. It is, in effect, a means of circumventing the duty
on MTBE. It should be stopped.
MTBE IMPORTS
------------------------------------------------------------------------
MTBE in RFG
Year MTBE (assumes 11% Total
by volume)
------------------------------------------------------------------------
1997.......................... 74,000 b/d.. 18,000 b/d + 92,000 b/d +
1998.......................... 66,000 b/d + 24,000 b/d + 90,000 b/d +
------------------------------------------------------------------------
Thus, under current law refiners importing MTBE in RFG are
short-changing the Treasury at least $16.5 million annually
(24,000 x $0.90 x .05 x 42 [42 gallons/barrel] x 365) by
importing MTBE under the motor fuel classification.
OXYGENATE TYPE ANALYSIS 1997 RFG SURVEY DATA
------------------------------------------------------------------------
Percent of samples with majority of oxygen
from \1\
Area -------------------------------------------
Combo/
MTBE Ethanol ETBE TAME other
-------------------------------------------------------------------\2\--
Atlantic City, NJ........... 97.47 1.27 0.00 1.27 0.00
Baltimore, MD............... 98.94 0.00 0.00 1.06 0.00
Boston-Worcester, MA........ 95.93 1.74 0.00 2.33 0.00
Chicago-Lake Co., IL, Gary, 5.84 94.16 0.00 0.00 0.00
IN.........................
Dallas-Fort Worth, TX....... 100.00 0.00 0.00 0.00 0.00
Hartford, CT................ 98.44 1.56 0.00 0.00 0.00
Houston-Galveston, TX....... 92.73 0.00 0.00 6.57 0.69
Los Angeles, CA............. 100.00 0.00 0.00 0.00 0.00
Louisville, KY.............. 74.75 25.25 0.00 0.00 0.00
Manchester, NH.............. 100.00 0.00 0.00 0.00 0.00
Milwaukee-Racine, WI........ 4.60 95.40 0.00 0.00 0.00
NY-NJ-Long Is.-CT........... 98.93 1.07 0.00 0.00 0.00
Norfolk-Virginia Beach, VA.. 100.00 0.00 0.00 0.00 0.00
Phila.-Wilm, DE-Trenton, NJ. 98.69 0.65 0.00 0.98 0.00
Phoenix, AZ................. 49.18 50.82 0.00 0.00 0.00
Portland, ME................ 100.00 0.00 0.00 0.00 0.00
Poughkeepsie, NY............ 97.76 2.24 0.00 0.00 0.00
Rhode Island................ 98.82 1.18 0.00 0.00 0.00
Richmond, VA................ 100.00 0.00 0.00 0.00 0.00
Sacramento, CA.............. 100.00 0.00 0.00 0.00 0.00
San Diego, CA............... 100.00 0.00 0.00 0.00 0.00
Springfield-MA.............. 98.20 1.80 0.00 0.00 0.00
Washington, D.C. area....... 98.07 0.00 0.00 1.54 0.39
------------------------------------------------------------------------
\1\ RFG Survey samples taken at retail gasoline stations. Categorization
based on the oxygenate providing more than 50% by weight of total
oxygen in a sample.
\2\ The ``Other'' category is composed of samples containing
combinations of oxygenates with no single oxygenate providing more
than 50% of total oxygen.
[[Page S4107]]
____
Comments Submitted By: Todd C. Sneller, Administrator, Nebraska Ethanol
Board
background
The Nebraska Ethanol Board is a state agency established in
1971 by Nebraska statute. The board is directed to assist the
private sector in establishing ethanol production facilities;
promote air quality improvement programs; establish marketing
procedures for ethanol based fuels; and sponsor research
related to the use of ethanol fuels.
In 1988 the board entered into an agreement for research
and development of ethanol based ethers and fuels containing
combinations of alcohol/ether mixtures. Partnership in this
effort was with American Eagle Fuels (AEF), a private
corporation. The board and AEF expended more than $2 million
to develop a small commercial scale facility capable of
producing ethyl tertiary butyl ether (ETBE). ETBE was
produced at the facility near Lincoln, Nebraska and small
quantities of the product were sold in Japan, Europe and the
United States for experimental purposes. At the same time,
the board engaged in an extensive cooperative testing program
with Sun Refining Company and other parties to examine the
properties of ethanol/ether combinations. This work was
intended to form the basis for an application to the U.S. EPA
that would seek approval for higher concentrations of
ethanol/ether mixtures to be blended in gasoline for
commercial sale.
The board's investment in research and development of ETBE
was based on the expectation that ethanol and ETBE would play
a significant role in oxygenated and reformulated fuel
programs required under the Clean Air Act Amendments of 1990.
Discussions during debate on CAA amendments, and recorded
floor debate in the Senate, clearly reflect the expectation
that ethanol and ETBE use would increase significantly as a
result of the oxygenate requirements included among the 1990
amendments to the Act.
impact of mtbe
Despite expectations that ethanol and ETBE would capture a
significant share of the oxygenated fuel market, experience
in the marketplace differed significantly from early
expectations. In one of the first oxygenated fuel markets,
the Colorado Front Range, the oxygenate most often used at
the outset of the Colorado program was MTBE. In the initial
years of the program, MTBE use constituted as much as 95% of
the oxygenated fuel sold during the carbon monoxide abatement
program. This occurred despite the fact that ethanol could
easily be transported by rail and truck from Nebraska and
other locations at rates competitive with gasoline. In other
oxygenated fuel program areas in the Midwest, such as
Milwaukee, MTBE quickly captured the market for oxygenated
gasoline despite the proximity of such areas to large ethanol
production facilities. In oxygenated fuel program areas
outside the Midwest, the aggressive marketing of low priced
MTBE allowed virtual market control. Price was clearly a key
and MTBE was available at rates equal to or below the cost of
gasoline.
The experience in reformulated gasoline market areas was
similar to the carbon monoxide abatement program. A review of
U.S. EPA market surveys of RFG areas for 1995-97 clearly
illustrates the trend toward MTBE. Early surveys show modest
use of ethanol in a few metropolitan areas and nominal use of
ETBE in fewer areas. However, the data show a clear trend
toward MTBE use following he first year of the federal RFG
program. The trend generally continues, with few exceptions,
in 1999.
The technical attributes of ETBE are well documented.
Compared to MTBE, ETBE is superior in virtually all areas
except price. ETBE, in the opinion of many refiners and auto
makers, is the perfect oxygenate because ``it acts like
gasoline''. Octane and distillation properties, low vapor
pressure characteristics, and ability to reduce aromatic and
sulfur levels while maintaining other performance qualities
of gasoline make ETBE an excellent component for cleaner
burning gasoline. However, economics in the highly
competitive world of petroleum refining and marketing is the
key criteria in most oxygenate purchasing transactions. MTBE
has a distinct advantage in pricing due, in large part, to
the low cost of methanol.
Methanol and MTBE are global commodities and as such
respond to pricing strategies of the largest producers of
these products. The public announcement of King Fahd's 1992
royal decree was clearly a confirmation that a significant
incentive was being instituted in the pricing of methanol and
related components of MTBE. This incentive has been
calculated to provide raw material price discounts at levels
thirty per cent below world prices. The impact of this decree
has been apparent over the past seven years. MTBE production
from Saudi Arabian plants has increased rapidly and steadily,
to nearly 100,000 barrels per day according to published
reports. That volume constitutes nearly half of total U.S.
MTBE demand. Due to this low cost, made possible by the Saudi
Arabian subsidy, a significant volume of the MTBE used in the
U.S. today is imported directly or indirectly from plants in
Saudi Arabia. As a result, ETBE cannot possibly be
competitive with this product on a cost basis, despite the
obvious technical advantages of ETBE. In addition, domestic
MTBE producers are keenly aware of this pricing differential
and the adverse impact it has on domestic supply and price.
conclusion
The result of the Saudi Arabian subsidy is clear. Domestic
ethanol and MTBE producers are disadvantaged and oxygenates
from domestic production facilities are often displaced by
low cost MTBE imports from Saudi Arabia. The intent of
Congress has been thwarted by imported MTBE use in the
oxygenate programs which were intended to stimulate a
domestic industry. U.S. grain producers who were told of the
predictions for increased corn and grain sorghum use via
ethanol and ETBE plants have not seen that domestic market
materialize in the substantial way predicted in 1990. The
U.S. balance of trade, already reeling from a high level of
imported petroleum products, is further exacerbated by
increased imports of MTBE from off shore plants. Oxygenate
pricing, pegged to the lower cost MTBE imports from Saudi
Arabia, reduces revenue and return on investment of domestic
oxygenate producers, thereby discouraging investment in new
or expanded plants in the United States. As a result, the
oxygenated fuel provisions of the Clean Air Act are not
generating domestic economic benefits to the extent possible.
The mechanism generating these adverse impacts, instituted
following the 1992 royal decree, must be removed or offset to
protect domestic economic interests.
____________________