Gas prices have been surging lately, and many believe the Environmental Protection Agency (EPA) and its requirement for refineries to blend a certain amount of renewable fuels into its processed end product is to blame.
The EPA, in order to monitor and regulate renewable energy production, requires that each and every gallon of renewable fuel be slapped with a renewable identification number or RIN (an ethanol credit). The RIN is proof that the proper amount of renewable fuel has been blended into its gasoline or diesel; these numbers are then recorded and turned into the EPA each year.
RINs act as a type of currency for the refineries who often find themselves with either too much or too little of the EPA’s required mandate of blended fuel. Those refineries who find themselves falling short can purchase RINs from those who are in excess and avoid possible penalties. Those with excess are also able to carry over and use it for the following year.
These standards were first enacted in 2005, reformed two years later, and this year there is a target of 13.8 billion gallons of blended fuel, according to MarketWatch. Blending requirements go up each year are expected to reach 36 billion gallons by 2022.
The requirements aren’t the only thing going up. In recent weeks, MarketWatch reports, the prices have exploded, and this week the price of a RIN gallon cost more than $1, a far cry from less than a year ago when it cost just 1 cent.
Ethanol production as a whole has seen recent decline; from Dec. 2011 to the beginning of this month, it has dropped 16 percent and is set to fall short of its target 13.8 billion barrels of blended fuel for the year, reports The Daily Caller.
It starts to put holes in the consumers pocket once refineries get weary and start changing business tactics. They begin exporting fuel so they don’t have to purchase RIN barrels.
The blending process takes place one of two ways: a refinery may blend it themselves, or it can be blended by a third-party that has the proper capabilities.
Marathon Petroleum Corp. (NYSE: MPC) and Tesoro (NYSE: TSO) have an advantage and have positioned themselves to be able to blend independently with their own fuel terminals. They also export their fuel, which doesn’t require the same EPA standards of blended oil, MarketWatch reports.
Not all refineries are built with the same capabilities; CVR Energy (NYSE: CVI) and Valero Energy (NYSE: VLO) fall into this category and must rely on an outside source to do the blending or buy RIN credits to ensure they meet the requirements. This is why larger refiners will produce excess RIN—to supply to smaller refineries on the second hand market.
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Currently, blending has been under its EPA mandate, contributing to the RIN price hike.
A major concern with rising RIN prices is what is being called the “blend wall,” which is simply the maximum amount of ethanol blended with gasoline allowed by law—10 percent.
Experts are saying that every refinery will hit this point at some time in the coming year, and some are already there. If this continues, so will the increase in production costs along with prices at the pump and the refiners bottom line.
The RIN program has also been shrouded in fraud controversy—more than 140 million fraudulent reports since November of 2011, according to The Daily Caller.
Andy Lipow, a Houston-based analyst, said in a Platts report, “We are heading for a train wreck.” He believes refineries will be scrambling to pick up RINs as the fourth-quarter approaches and the EPA is monitoring for its annual production requirements.
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