Biofuels issue has real effect on small gas stations

Source: By James Osborne, Houston Chronicle • Posted: Friday, August 26, 2016

  • Katie Leonard fills her truck up with gasoline at the Easy Lane Food Mart and Valero gas station in the 5200 block of Louetta Aug. 24, 2016, in Spring. ( James Nielsen / Houston Chronicle ) Photo: James Nielsen, Staff / © 2016 Houston Chronicle
Photo: James Nielsen, Staff. Katie Leonard fills her truck up with gasoline at the Easy Lane Food Mart and Valero gas station in the 5200 block of Louetta Aug. 24, 2016, in Spring. ( James Nielsen / Houston Chronicle )

The fallout from a recent spike in the price of government credits for biofuels is spreading beyond refineries into the retail gasoline business.

Gas station owners say they, too, are losing out after the price of RINs – the credits that refineries need to prove there is ethanol and other biofuels in the fuel supply – shot up close to 40 percent between January and August.

A paper commissioned by the Small Retailer Coalition, and written by Bud Weinstein, an economist at Southern Methodist University’s Maguire Energy Institute, says smaller independent stations are being undercut by larger chains that blend their own ethanol and can sell the resulting credits at a profit.

The smaller retailers might operate under the Exxon or Shell brands but are financially independent of those corporate giants. They are left to watch as their competition across the street takes those RIN profits and uses them to slash gasoline prices.

“Our investment is going way out of control,” said Karim Dhuakani, who owns 10 retail gasoline outlets in the Houston area. “It’s already hard for us to compete with the bigger corporate store, like Sam’s Club and Wal-Mart and Kroger.”

The biofuel program was created by Congress more than a decade ago to expand the market for ethanol and other biofuels as an alternative to gasoline. The argument was that by using U.S. crops like corn for fuel the country would reduce its dependence on foreign oil, while using a less carbon intensive fuel than gasoline.

But the program has steadily fallen under criticism, as the advanced biofuels derived from wood shavings and other waste that were imagined by Congress have yet to move into commercial production. At the same time, farmers, biofuel producers and traditional energy companies have come to rely on the program for revenue.

Refiners, wholesalers and retailers that blend ethanol into gasoline earn credits that they can sell to refiners that don’t. The market for the credits has also attracted Wall Street investors, whose speculative activities can drive prices up, hurting companies that need to buy credits and boosting those that have credits to sell.

In his paper, Weinstein cites an earnings report last year from Marathon Petroleum Corp., the Ohio refiner that owns the Speedway gas station chain, stating it made $74 million selling excess RINs in 2014.

“The large-volume retailers going in up the street has been going on a long time, but the RINs market has been accelerating the demise of the small mom-and-pop retailer,” Weinstein said in an interview. “The trouble with the whole (biofuels program) is it’s created some unintended consequences.”

The situation within the retail gasoline industry mirrors that within the refining sector, where independent refiners like CVR Energy in Sugar Land and Valero in San Antonio are spending more and more on RINs at a time refining margins are shrinking.

The losses have accelerated a debate within the energy sector about who should be responsible for meeting the government’s biofuel madate, the refineries that produce the gasoline and diesel or the wholesalers that blend biofuels into the fuel stream before it is trucked to gasoline stations.

At the same time, the volume of Wall Street brokers trading RINs can cause severe fluctuations, infuriating executives like CVR’s Jack Lipinski, who met with EPA officials earlier this year to request an overhaul of the RIN market.

For now, small gasoline stations seem to have little choice except to wait out the current spike in RIN prices and hope they can hold on.

The buildings and equipment to blend ethanol would require millions of dollars, something many gas station owners can not afford.

Bill Douglass, chairman of the newly formed Small Retailer Coalition, said with the profits larger retailers were making selling RINs, they could afford to undercut their competition on gasoline prices.

“They know you’ll drown or you’ll come up above them” in price, he said.

Ultimately, U.S. motorists will lose out, Weinstein says. Between 1994 and 2015, the number of filling stations fell from more than 200,000 to about 150,000.

“If profit margins for small, independent retailers continue to narrow in order to ‘meet the competition,’ even more of these businesses can be expected to fail in coming years,” his paper says. “Fewer small retailers, in turn, will mean higher fuel prices for consumers.”