Feature: Rising US gasoline costs, refinery closures and the Renewable Fuel Standard

Source: By Janet McGurty, S&P Global • Posted: Monday, April 25, 2022

US refiners are taking their plea to the public with a new ad campaign launched by Fueling American Jobs Coalition asking President Biden to lower gasoline prices by fixing the Environmental Protection Agency’s Renewable Fuel Standard, which mandates volumes of renewable fuel blending required by refiners.

“This new ad campaign comes as experts warn that the broken RFS is adding up to 30 cents/gal at the pump, and as Russia’s war in Ukraine and record inflation push gas prices to near-record levels nationwide,” the group said in an April 22 statement.

US gasoline prices are soaring just ahead of the summer driving season as a result of low inventories, the return of demand post-pandemic and more expensive crude oil, with some gasoline prices touching levels not seen since 2008, when crude prices hit $145/b.

US Gulf Coast cracking margins for WTI MEH are extremely high, averaging $35.76 so far in Q2 2022, up from the $20.84/b in Q1 2022, margin data from S&P Global Commodity Insights showed.

Stripping out the cost of RINs – the credits issued by the RFS and bought by refiners who are unable to blend enough renewables into their fuel to meet their renewable volume obligations – these margins drop by about $4/b to average $30.89/b in Q2 and $16.33/b in Q1 illustrating the impact of the RFS on refining margins and the cost of fuel.

Fueling American Jobs Coalition advocates an overhaul of the RFS to lower gasoline prices. Its campaign comes on the heels of President Biden’s April 12 waiver to increase the use of renewable fuels by raising the blending volumes of less expensive ethanol into summer grade gasoline to 15% from 10%.

In a world of tight supply, increasing ethanol blending to 15% will indeed add supply and help lower gasoline prices for E15 consumers by about 3%-7%, according Renewable Fuels Association’s president Geoff Cooper.

But the overall impact will be blunted by limited access by most US drivers to the higher ethanol fuel.

“It’s becoming widely available – slowly – but at last check some 2,500 gas stations in the US offered it, mainly in the corn belt areas and the Midwest,” said Patrick De Haan, analyst with Gasbuddy.com, which tracks gasoline demand and usage at 140,000 stations throughout the US and Canada.

Market tightness to continue

There is contentious and litigious history between the renewable fuel lobby and the refiners, spanning back to 2005 and the inception of the RFS as part of the Energy Policy Act of 2005.

That law sought to protect US energy security from foreign oil risk by incentivizing renewables. This was prior to the shale revolution, increased crude production and the US becoming a major exporter.

John Auers, executive vice president at Dallas-based consulting firm, Turner Mason, said Biden’s recent decision to allow E15 use is not expected to add a lot more ethanol into the gasoline pool.

“”It’s a political win. But not a giant one. And not super impactful on the market itself,” he said. “There is not going to be a lot more ethanol that actually moves into the pool.”

According to Renewable Fuel Association estimates, 814 million gallons of E15 was sold in the US in 2021 with an ethanol content of 122 million gallons. The E15 summer waiver will only add about 30 million gallons of ethanol to the pool.

Globally, tight gasoline and diesel supply stems from a spate of refinery closures, as the drop in demand due to coronavirus lockdowns culled less efficient plants.

“It’s a big deal. We’ve lost 3.5 million b/d of refining capacity globally. And that’s made everything tight,” Auers said.

US gasoline supplies are holding just below the five-year average at 232.4 million barrels for the week ended April 15, the most recent US Energy Information Administration data showed. But supply in the central US Atlantic Coast is extremely low, well-below the five-year average at 26.95 million barrels for the week ended April 15, EIA data shows, amid a slowdown in imports from Europe.

Refinery closures continue

Even with the rebound in demand, high refinery margins and low fuel supply, refiners are still closing their doors, with many citing the high cost of complying with the RFS as a reason for shutting their doors.

The latest announced closure was from LyondellBasell. In its April 21 statement, the company said was getting out of the refining business by shutting its 263,776 b/d Houston refinery after it was unable to find a buyer. In earlier statements made in September 2021, the company cited the high cost of complying with US RFS as a reason it was looking to sell the plant.

“More independent refinery closures would cause catastrophic job losses, even higher gas prices and increase our nation’s reliance on foreign fuel at a time when few can afford it,” the Fueling American Jobs Coalition said.

They are “urging President Biden and his administration to take swift action to lower gas prices, save union jobs, and protect America’s energy independence by fixing the RFS once and for all,” according to their statement.

This is a trend which could continue due to the high cost of the RFS, which could further tighten the market.

“It’s a tight market now. And then we have to worry about hurricane season,” Auers said.