Ethanol A Cautionary Tale - EPRINC · • 1980-1990: Rationalization of refining. – Closure of...
Transcript of Ethanol A Cautionary Tale - EPRINC · • 1980-1990: Rationalization of refining. – Closure of...
Ethanol
A Cautionary Tale Lucian Pugliaresi
Energy Policy Research Foundation, Inc.Aspen Institute
June 26-28, 2009
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org1
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org2
EISA ’07 Renewable Fuels Standard
Source: DOE
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Biomass based Diesel
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Cellulosic Advanced
Corn Ethanol / Other
EPACT 05
What Were They Thinking?• 15 billion gallon mandate easily achievable with growing
gasoline demand -- blend wall would not exceed 10% (2007 forecast environment).
• Gasoline prices would rise – making ethanol cost competitive – an antidote to high gasoline prices.
• Mandates were needed to overcome resistance from the petroleum industry.
• Rural renaissance .• And besides – it would deliver substantial benefits in lower
emissions of GHGs.
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 3
What did they miss?• Gasoline demand did not grow, prices fell
• RFS mandates were volumetric – driving fuel sector to the blend wall in next year or two.
• Ethanol not cost competitive under most scenarios.
• Ethanol substitutes for gasoline -- not crude oil --leading to refinery output inefficiencies
• Food versus fuel problem.
• Carbon benefits under attack.
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 4
What’s a Refinery?
Alkylation
Catalytic Reforming
Isomerization
Coking
Fluid Catalytic Cracking
Hydrocracking
Lubricants
Deasphalting
Hydrotreating
Vacuum Distillation
AtmosphericDistillation
gas oils
residue
distillates
naphthas
gasesFuel GasPropane
Gasoline Blendstocks
Jet Fuel
Diesel Fuels and Heating Oils
Gasoline and Distillate
Blendstocks
Lubricating Oils
Coke
Asphalt
U.S. Oil Refineries History: 1970 - Present
• 1970s: The Small Refiner Bias in the 1973 price control program encouraged the building of excess small refineries.
• 1979: Price controls end.• 1980-1990: Rationalization of refining.
– Closure of small, uneconomic units - adversely impacted by population and crude supply shifts.
– Capacity at existing, better-located facilities expanded.• Remaining refinery campuses become bigger, more efficient.
• Mid-1990s: Capacity grows; demand grows faster.• 2000s: More investment needed to expand existing refineries.
– Regulatory issues– Capital requirements and investment decisions
What happened to “Refining’s Golden Age?”
US Ethanol Consumption: 2000 - Present
• Quick ramp-up made it look easy—but really was displacement of MTBE• Ethanol does not displace much foreign oil. 6 bil gallons per year of
ethanol saves approx 100 million bbls of oil. • Corn prices have risen from $1.60 to $6.00. How much attributable to
ethanol driven demand? $1.00? $2.00?• At $1.00/bu, oil saved cost $130/bbl; at $2.00/bu, the figure is $230 per
bbl.• Current Ethanol Economics Looks Dicey—With high corn prices, low fuel
ethanol prices, existing plants earn losses. • Existing plants have 7 bil gal capacity; mandate calls for 2 bil more• Plants under construction and planned may not be completed/brought on
line• If corn prices remain stable at current levels, ethanol prices must rise by at
least $0.50 per gallon in order for ethanol to be sufficiently profitable to attract investment.
• More capacity needed to meet 9 bil gal mandate for 2008
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org8
U.S. Corn Ethanol Production
Source : EIA - http://tonto.eia.doe.gov/dnav/pet/pet_pnp_oxy_dc_nus_mbblpd_m.htmyyy
•Ethanol In Gasoline---Long history/Early start as gasohol•100,000 bd (150 million gal/yr) in 1998•Up-tick in mid-2006 due to MTBE phase-out•Present US production of 640,000 •“Run-rate” equivalent to 9.81 bil gal/yr—7.2% of 2009 Q1 national gasoline supplv
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• Compatibility issues have kept ethanol and blends out of petroleum pipelines.
• The industry is studying compatibility. While optimism is prevalent, if and to what extent ethanol and its blends will be deemed suitable for pipeline input is unclear.
• Ethanol movement by rail grows, with unit trains offering the best economics. Few ethanol plants and fuel terminals have sidings for rail cars/unit trains. Trucks commonly cover the “first” and “last” mile.
• New oil terminal facilities are configuring rail access where they can. Rail offers routes that suit ethanol transport geographically; pipelines more often are laid-out for Gulf Coast-North/NE transport.
– Ethanol needs to be supplied universally. Transport systems still need to be established for ESIA 2007 supply amounts.
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org9
Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending
• Corn will likely be the feedstock of choice until 2015. Will there be enough supply? And at what cost to the food supply? 5.5 billion bushels will be needed, as well as significant new production capacity.
• E-10 is successfully operating in current model autos, most current model marine and small power applications. It was seen as the predominant fuel. Other higher blends were not seen as an option; a standardized E-85 product will absorb mandated ethanol amounts.
• Concern was expressed regarding the slow roll-out of E-85
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org10
Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending (Contd)
Lifecycle GHG Emissions
11Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Source: EPA, http://www.epa.gov/OMS/renewablefuels/420f09024.htm
12Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
13Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Ethanol Subsidies
14Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
2008 Ethanol Subsidies $ MillionMarket Price Support on Domestic Production 2,240Market Price Support on Exports 30Volumetric Excise Tax Credit (Blender's Credit)* 4,335Reductions in State Motor Fuels Tax 440Federal Small Producer Tax Credit 170Excess of Acclerrated Over Cost Depreciation 680Federal Grants, Demonstration Projects, R&D 350Access to Tax-Exempt Solid Waste Bonds 110Deferral of gain on sale of farm refineries to coops 20Crop Support to Corn 730Crop Support to Sorghum 20Credits for Clean Fuel Refueling Infrastructure 20
Total: 9,145Total Subsidy Per Gallon of Ethanol: $1.08TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63(Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed
Source: http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf , EPRINC calculated Blender's Credit
A Selection of Ethanol Subsidies
15Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
2008 Ethanol Subsidies $ MillionMarket Price Support on Domestic Production 2,240Market Price Support on Exports 30Volumetric Excise Tax Credit (Blender's Credit)* 4,335Reductions in State Motor Fuels Tax 440Federal Small Producer Tax Credit 170Excess of Acclerrated Over Cost Depreciation 680Federal Grants, Demonstration Projects, R&D 350Access to Tax-Exempt Solid Waste Bonds 110Deferral of gain on sale of farm refineries to coops 20Crop Support to Corn 730Crop Support to Sorghum 20Credits for Clean Fuel Refueling Infrastructure 20
Ethanol Subsidies
16Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Total 2008 Ethanol Subsidies: $9.15 billion
Total Subsidy Per Gallon of Ethanol: $1.08
TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63
(Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed
Source: http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf , EPRINC calculated Blender's Credit
Energy Independence and Security Act of 2007—
Mandated Ethanol Future
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org17
Billions of Gallons
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org18
EISA And Gasoline—Benchmarks
Materials 2008 2015 2022
Corn Ethanol 9 15 15
Cellulosic -- 3 16
Advanced for Mogas* -- 0.7 2
Total 9 18.7 33*Assumes Advanced is divided between diesel and motor gasoline.
• Not a commercial product now
• Focal point of a great deal of R & D– Many promising projects
– A number of corporate entities involved
– Still in the lab
• If Cellulosic moves beyond the lab, significant capital investment needed– 16 bgy = 1 million bbls per day. That is the amount of crude produced in Texas!
• Policy-makers have placed a bet on something that does not exist– If Cellulosic is not available as EISA mandates, EPA will likely issue a waiver
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org19
Cellulosic Ethanol?
E-85 Challenges
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org20
Product Prices and Share
21Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
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CBOT Ethanol Futures
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Ethanol Production's Share of Finished Motor Gasoline Supplied (%)
Source: EIA Data, CME Group, EPRINC Calculations. All prices are for front month futures contracts. Prices are not BTU adjusted.
The Blend Wall in a low RBOB World
22Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
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Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production
Falling values for ethanol will be mirrored by rising values for RINs
After serving its role as an oxygenate, ethanol must compete directly with gasoline
Estimated all-in cost for ethanol: corn + operating costs + capital costs*
Ethanol loses significant value as it moves into E85
Price difference between ethanol and RBOB
Blender's Credit: $0.45/gallon
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org23
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CAFÉ MPG
Passenger Car MPG
Light Trucks/SUV MPG
Model Year CAFÉ and Vehicle MPG
Source: NHTSA, EIA
Take Away: Reality lags expectations. Mismatch between actual MPG and policy goals.
• Currently sold at roughly 2000 service stations. • Used in a disappointing few FFVs.• Mispriced – Current MPG/BTU adjusted price is $2.87 v. $2.69
for regular gasoline.– Market mechanism needs to price E85 correctly.– E85 should be priced to attract motorist use.
• E85 convenience factor – takes 3 fill-ups to go as many miles as 2 regular fill-ups.– Convenience factor needs to be priced.
• Bottom Line – Consumer needs a good reason to walk into a dealership and ask to buy a FFV.
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org24
Source: AAAFuelGaugeReport.com
E85 Rollout Moves Slowly
Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 25Source: EIA Data, DOE Data, EPRINC Calculations
FFVs and E85 Usage
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% of FFV's Actually Operating on E85
Retail Fuel Prices
26Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
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Diesel*
*Price is per gallon of gasoline equivalent (BTU basis), according to DOE conversion standards: 1 Gallon of Gasoline = 1.333 gallons of E85 and 0.904 gallons of diesel. Source: DOE Data
Subsidies and Support to Electric Production by Selected Primary Energy Sources
27Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Primary Energy Source
FY 2007 Net Generation (billion kilowatthours)
Subsidies and Support Allocated to Electric Generation (million FY 2007 dollars)
Subsidies and Support per Unit of Production (dollars/megawatt hour)
Natural Gas and Petroleum Liquids 919 227 0.247007617Coal 1946 854 0.438848921Hydroelectric 258 174 0.674418605Biomass 40 36 0.9Geothermal 15 14 0.933333333Nuclear 794 1267 1.595717884Wind 31 724 23.35483871Solar 1 174 174Refined Coal 72 2156 29.94444444
Source: EIA Data
Energy Subsidies Not Related to Electricity Production
28Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Category Fuel Consumption (Quadrillion BTU)
FY 2007 Subsidy and Suppot (million 2007 dollars)
Subsidy per Million BTU
Coal 1.93 78 0.04Refined Coal 0.16 214 1.35Natural Gas and Petroleum Liquids 55.78 1921 0.03Ethanol/Biofuels 0.57 3249 5.72Geothermal 0.04 1 0.02Solar 0.07 360 2.82Other Renewables 2.5 184 0.14Hydrogen * 230 NMTotal Fuel Specific 60.95 6237 0.1Total Non-Fuel Specific NM 3597 NMTotal End-Use and Non-Electricity NM 9834 NM
Source: EIA Data
29Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Obama Administration Proposing New Taxes on Oil and Gas Industry
A Selection of Proposed TaxesEstimated Average Annual Cost, 2010-2019 ($ millions)
Reinstate Superfund Taxes - Would Impose taxes on oil and chemical products and use revenues to help clean up contaminated sites. 1720.5Repeal LIFO - Limit the options to account for the flow of inventories for tax. Would require significant amounts to be treated as income. 6105.2Levy excise tax on Gulf of Mexico oil and gas - Impose an excise or severance tax on oil and gas production from federal offshore leases. 528.3Repeal expensing of intangible drilling costs - Eliminate the ability to immediately deduct certain costs associated with drilling and developing wells for tax purposes and instead recover such costs over some period of time. 334.9
Repeal deduction for tertiary injectants - Eliminate the ability to immediately deduct certain costs associated with tertiary recovery projects for tax purposes and instead recover such costs over some period of time. 6.2
Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities. 1329.3Increase G&G amortization period for independent producers to 7 years - Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies. 118.9
Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year. 825.1Fee on nonproducing leases ("use or lose") 115.6Total: 11088.9
30Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Obama Administration Proposing New Taxes on Oil and Gas Industry
A Selection of Proposed TaxesEstimated Average Annual Cost, 2010-2019 ($ millions)
Reinstate Superfund Taxes - Would Impose taxes on oil and chemical products and use revenues to help clean up contaminated sites. 1720.5
Repeal LIFO - Limit the options to account for the flow of inventories for tax. Would require significant amounts to be treated as income. 6105.2Levy excise tax on Gulf of Mexico oil and gas - Impose an excise or severance tax on oil and gas production from federal offshore leases. 528.3Repeal expensing of intangible drilling costs - Eliminate the ability to immediately deduct certain costs associated with drilling and developing wells for tax purposes and instead recover such costs over some period of time. 334.9Repeal deduction for tertiary injectants - Eliminate the ability to immediately deduct certain costs associated with tertiary recovery projects for tax purposes and instead recover such costs over some period of time. 6.2
31Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Obama Administration Proposing New Taxes on Oil and Gas Industry
A Selection of Proposed TaxesEstimated Average Annual Cost, 2010-2019 ($ millions)
Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities. 1329.3Increase G&G amortization period for independent producers to 7 years -Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies. 118.9
Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year. 825.1Fee on nonproducing leases ("use or lose") 115.6
Total: 11088.9
32Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Cost and Effectiveness of Cash for Guzzlers Program
Baseline=18 mpg, 12,000 VMT
Voucher Value
Program Cost for One Million Vehicles
Gallons Saved Per Vehicle, Annually
Total Fuel Savings for One Million Vehicles Over Eight Years, Gallons
Cost Per Gallon Saved Over Eight Years
Fleet Fuel Consumption Reduction Compared to 2008 Rate
New Car, +4 MPG $3,500 $3,500,000,000
121.2 969,600,000 $3.61 0.0882%
New Car, +10 MPG $4,500 $4,500,000,000
238.1 1,904,800,000 $2.36 0.1733%
New Light Truck/SUV, +2 MPG
$3,500 $3,500,000,000
66.7 533,600,000 $6.56 0.0485%
New Light Truck/SUV, +5 MPG
$4,500 $4,500,000,000
144.9 1,159,200,000 $3.88 0.1054%
Sources: EIA Data, EPA Data, EPRINC Calculations
33Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
34Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
35Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Fleet Tailpipe Emission Reductions
Replacing 1 million vehicles from…..
Reduces total CO emissions by…..
Reduces total VOC emissions by…..
Reduces total NOx emissions by…..
1980 0.1050% 0.1203% 0.8004%
1990 0.0000% 0.1088% 0.3446%
2000 0.0000% 0.0576% 0.1223%
36Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Obama Administration Proposing New Taxes on Oil and Gas Industry
A Selection of Proposed TaxesEstimated Average Annual Cost, 2010-2019 ($ millions)
Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities. 1329.3Increase G&G amortization period for independent producers to 7 years -Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies. 118.9
Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year. 825.1Fee on nonproducing leases ("use or lose") 115.6
Total: 11088.9
Domestic Crude Oil Supply and Demand
37Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
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U.S. Field Production of Crude Oil (Thousand Barrels per Day)
Source: EIA Data
38Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
What it takes to offset 1 gigaton of carbon…
Source: DOE Climate Change Technology Program
TODAY’S TECHNOLOGY Actions providing 1 Gt mitigation/year
Coal-fired power plants Build 1,000 “zero-emission” 500 MW coal-fired power plants
Geologic sequestration Install 3,700 sequestration sites like Norway’s Sleipnerproject (0.27 MtC/year)
Nuclear Build 500 new nuclear plants, each 1 GW in size
Efficiency Deploy 1 billion new cars at 40 miles per gallon (mpg) instead of 20 mpg
Wind energy Install capacity to supply 50 times the current global wind generation
Solar photovoltaics Install capacity to supply 1000 times the current global solar PV generation
Biofuels for transport Convert a barren area 15 times the size of Iowa’s farmland (30 million acres) to biomass production
CO2 storage in forests Convert a barren area 30 times the size of Iowa’s farmland to new forest
39Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
If global demand increases without adequate investment in new production capacity, given natural decline rates, there is risk of a significant liquids supply gap.
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Source: CSIS, National Petroleum Council
Demand mitigation in the short-term
40Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
Projected Petroleum Imports
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41Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
42Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org
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U.S. Crude Oil Net ImportsWorst-Case Economic Scenario: 0% Annual GDP Growth Through
2020With Crude Oil Prices Rising 3% Annually
Positive Economic Growth, GDP +2.5%/yr
No Economic Growth, GDP +0%/yr
0% GDP Growth and RFS is met in 2020