Lawmakers Examine Ethanol Credits’ Affect on Gas Prices

Source: By DAN STRUMPF, Wall Street Journal • Posted: Friday, March 15, 2013

Two congressional committees are looking into whether a price spike in an obscure corner of the biofuels market is behind the recent run-up in the cost of gasoline.

The price of credits used by refiners to meet federal ethanol-blending requirements has risen more than 1,000% in recent weeks. The heightened volatility in this normally sleepy market has raised concerns that it is a factor in the recent rise in the price of gasoline.

Retail gasoline prices averaged $3.706 a gallon nationally Wednesday, according to auto club AAA, an increase of more than 41 cents, or 12.6%, since the start of the year. U.S. crude-oil futures have risen less than 1% during the same period.

Earlier this week, Sen. Ron Wyden (D. Ore.), chairman of the Senate Energy and Natural Resources Committee, sent a letter to the Energy Information Administration requesting information about gasoline prices, including data on oil production, exports and transportation infrastructure. The committee plans to hold a hearing on gasoline this spring.

The committee is also looking into the recent increase in the price of ethanol credits, spokesman Keith Chu said.

“It’s an issue that’s surfaced as we’re looking into the gas-price run-up,” Mr. Chu said.

Separately, the Republican-controlled House Energy and Commerce Committee has taken notice of the recent surge in ethanol-credit prices, a spokeswoman said. The committee plans to hold hearings later this year on renewable-fuel mandates and intends to review whether they are affecting gasoline prices, she said.

Neither committee has launched a formal investigation.

The Environmental Protection Agency mandates that a certain amount of ethanol be blended into the U.S. gasoline supply each year. When an ethanol maker produces a gallon, the company receives a credit representing roughly that much ethanol. Such credits—called Renewable Identification Numbers, or RINs, after the numerical code assigned to each gallon—can subsequently be bought by refineries to help meet the mandates.

Last year, the U.S. consumed about 133 billion gallons of gasoline, the lowest level in 12 years. As most retail gasoline sold contains 10% ethanol, roughly 13.3 billion gallons of ethanol was blended into gasoline, just above last year’s approximately 13.2 billion-gallon requirement.

But the EPA mandate is set to rise this year—even as demand for fuel declines. The latest proposal, if approved, could force refiners and fuel importers to use more than 14 billion gallons of ethanol.

Refiners are concerned they won’t be able to sell enough ethanol to keep up with the mandates. Auto makers say most vehicles can’t handle more than 10% ethanol, and the market for higher blends is relatively small.

That has caused the price of ethanol credits to rise sharply. RINs representing a gallon of ethanol traded for less than 10 cents at the start of the year. Prices climbed rapidly in recent weeks, rising to more than $1 on Monday. On Tuesday, the price dropped to less than 80 cents.

“There’s a worry of there not being enough RINs to meet the mandate,” this year or in 2014, said Mike Garcia, an ethanol broker at Atlas Commodities LLC in Houston. “That’s caused a flurry of these refineries to go out and buy them.”

Not everyone thinks that the run-up in the price of credits is spilling over into gasoline prices. Gene Gebolys, chief executive of World Energy, a Boston-based trader of biodiesel, said the relationship between the two markets has been “overblown.”

“Yes, the RIN values are going up and yes, that’s a contributing factor to the overall price of gasoline…but it’s a bit simplistic to say that if the RINs go up, they immediately translate to a one-for-one increase in gasoline prices,” he said.

But some refiners and traders say the volatility could be affecting the price of gasoline. If the credits get too expensive, refiners may opt to curb imports or export more gasoline, they said.

“The most likely scenario is that costs would be passed on to consumers,” said Bill Day, spokesman for refiner Valero Energy Corp. VLO +0.97%