Consumers to Pay $13 Billion Price as Ethanol Upends Refiners

Source: By Bradley Olson, Bloomberg • Posted: Tuesday, March 19, 2013

U.S. drivers face a $13 billion increase in the cost of gasoline as the price of federally- mandated ethanol credits has risen tenfold for oil refiners including Valero Energy Corp. (VLO) and CVR Energy Inc.

Fuel processors such as Valero, the world’s largest independent refiner and Exxon Mobil Corp. (XOM) are pushing the U.S. Environmental Protection Agency to reduce the amount of ethanol they’re required to add to gasoline to avoid what they say will be a sharp spike in prices at the pump just as the summer driving season begins.

Refiners buy biofuel credits that are available as an alternative to actually blending ethanol into gasoline. The cost of those credits has ballooned tenfold as the 2013 federal mandate for biofuel exceeds what the market can absorb. Energy traders and companies that blend gasoline and ethanol are buying and holding on to the credits, expecting prices to go higher and making the credits harder to get, said Valero Chairman and Chief Executive Officer Bill Klesse.

“You have traders hoarding,” Klesse said in an interview yesterday at the annual gathering of the American Fuel and Petrochemical Manufacturers, or AFPM, a refining trade group. “We’re going to pass it on, one way or another. The EPA has to address it and address it now.”

Pump Price

Concern about the rising cost of the credits has driven down refiners’ share prices, draining $5 billion in market value last week from the 10 largest publicly traded U.S. independent refiners, according to Barclays Plc.

Consumers are at risk of paying 10 cents a gallon higher for gasoline this year if the ethanol credits continue to sell at a price of more than $1, Wells Fargo (WFC) analyst Roger Read said March 11 in a note to investors.

Pump prices could surge even more as the credit cost makes imports more expensive and creates an incentive for U.S. refiners to seek export opportunities where no ethanol blending is required, Read said. “The likely impact for U.S. consumers is higher gasoline prices as supply declines.”

An increase of 10 cents for every gallon of gasoline consumed with ethanol would equate to more than a $13 billion cost to consumers for the 13.8 billion gallons of ethanol that are mandated for blending this year, according to data compiled by Bloomberg.

The rising cost of credits will negatively impact refiner earnings in the “best case” and “in the worst case could take down both the U.S. consumer and the domestic economy,” Chi Chow, an analyst at Macquarie Group Ltd. in Denver, said in a March 13 note to clients.

EPA Meetings

Valero, which is also among the country’s top ethanol producers, plans meetings with members of Congress and EPA officials this week to discuss potential changes to the Renewable Fuel Standard, part of a 2007 law that requires the blending of biofuels, said Bill Day, a company spokesman.

The EPA is accepting public comments on the fuel standards until April 7, and then will review the comments before deciding on any potential revisions to even higher blending requirements next year, the agency said in an e-mailed statement.

As an alternative to blending ethanol, refiners can buy credits called Renewable Identification Numbers, or RINS, to cover part of the requirement.

Some auto manufacturers won’t offer a warranty if drivers use fuel with more than 10 percent ethanol, effectively capping how much refiners can blend at about 13.4 billion gallons for 2013, Charles Drevna, the AFPM’s president, said yesterday at the conference. That’s 400 million gallons less than the government mandate, raising demand for RIN credits to make up the difference.

Rising Price

The price for RINS rose to a record $1.06 on March 8 and closed at 77 cents yesterday, a tenfold increase from 7 cents on Jan. 8, according to data compiled by Bloomberg.

The law allows blenders of the fuel, such as owners of retail gasoline stations and storage tanks, to be granted RIN credits that they can sell to refiners or traders. Blenders have seen profits from selling RINS soar amid the runup in prices, Jack Lipinski, the CEO of CVR Energy Inc. (CVI), said in an interview at the conference.

“The intent of the law was to assure ethanol was blended,” he said. “RINS should not be a separate profit center.”

Lipinski and Valero’s Klesse said the EPA should consider making blenders of the ethanol accountable for the use of the biofuel, a short-term solution that could quickly force down RIN prices, both executives said.

Ethanol Cap

Exxon favors capping the amount of ethanol mandated for blending with gasoline at 10 percent of gasoline demand, Bill Colton, the company’s vice president for corporate strategic planning, said last week.

Drevna and Tesoro favor a complete repeal of the Renewable Fuel Standard, a prospect that may become more likely as gasoline prices rise due to the cost of RINs, Paul Sankey, an analyst with Deutsche Bank AG in New York, said in a March 12 note to clients.

“Oil market players may be deliberately pushing for this outcome,” he said.

“The train is getting ready to leave the station,” Stephen Brown, vice president of government relations for Tesoro, said in an interview yesterday at the AFPM conference. “Reform is going to come to the market.”