Rising cost of corn ethanol credits alarms Hill

Posted: Wednesday, March 20, 2013

Congressional committees are taking note of a massive spike in the price of corn ethanol credits that refiners use to meet the Environmental Protection Agency’s renewable fuels mandate — amid concern it could increase gasoline prices.

House and Senate energy panels are eyeing the price of ethanol renewable identification numbers, or RINs, which have skyrocketed from pennies a gallon to more than $1 per gallon in recent weeks. That could cost the refining industry $7 billion this year, according to a Barclays analyst as cited by the Financial Times.

“We’ve talked about how they’ve been skyrocketing,” House Energy and Power Subcommittee Chairman Ed Whitfield (R-Ky.) said last week, though he was unsure what action his panel would take.

Refiners and the ethanol industry disagree about the cause of the price spike.

A spokesman for Valero, the largest independent U.S. refiner, said refiners can do only three things about the spike in the short term: Increase gasoline exports to countries that do not have the added RIN cost, decrease the amount of gasoline refined or shift the costs to gasoline consumers. “I suspect a combination of all three things happening with refiners,” said the spokesman, Bill Day.

That could further restrict domestic supply and raise gasoline prices, which typically rise anyway around the summer driving season.

“We’re just in the middle of a tornado trying to figure out what to do,” said Stephen Brown, vice president for federal and government affairs at independent refiner Tesoro. “But we can all agree this is not a good thing for consumers.”

“It’s a surprise to a lot of folks that it came so quickly,” said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers.

Drevna said he warned of factors that could drive up the price last June, during a meeting that senior petroleum industry officials had with top White House energy aide Heather Zichal and EPA air quality chief Gina McCarthy. At the time, the main topic was the plague of tens of millions of fake biodiesel RINs on the market.

A Republican aide to the House Energy and Commerce Committee said the panel plans to “review all aspects” of the renewable fuels standard, “including its potential impact on gasoline prices.” The committee plans to hold hearings on the renewable fuels mandate later this year, though nothing is scheduled yet, the aide said.

The panel isn’t conducting a separate investigation into the RINs prices at the moment, the aide added.

A spokesman for Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Ore.) said the ethanol RIN prices are on that committee’s radar too.

“This is one of many possible issues that our staff [is] looking at when it comes to gas prices,” the spokesman said.

Senate Environment and Public Works ranking member David Vitter (R-La.) — a frequent critic of EPA — is also seen as a likely participant in any congressional oversight on the issue.

“Not sure to what extent, but the answer is yes,” Vitter spokesman Luke Bolar said when asked whether committee GOP staff were looking into the issue.

The staff for Environment and Public Works Chairwoman Barbara Boxer (D-Calif.) is looking into it as well.

Congress can do little about the problem in the short term because of regional — rather than partisan — disagreements over ethanol use in gasoline.

Some refiners acknowledge that neither EPA nor Congress is likely to agree to a short-term fix, but they say more attention to the issue will help longer-term efforts to make fixes to the renewable fuels mandate. The attention should also scare off speculators and other factors driving up costs in the near term.

Last Tuesday alone, the ethanol RINs price wildly fluctuated from roughly $1 a gallon, down to 60 cents, back up to 90 cents and then settling at around 80 cents. The price remained relatively stable at around 75 cents a gallon as of Friday.

“There’s no question that there has been an explosion,” said Ben Brockwell, director for data, price and information services at the Oil Price Information Service.

Refineries can absorb the price shock for now, Brockwell said, because their per-barrel profit margins are high at the moment. “But the longer that [RINs] price stays up,” the more problematic it is for refiners, which will respond in kind, he said.

Brockwell said one indicator will be how the issue affects first-quarter earnings for refining companies.

The volatility and price hike have set Wall Street abuzz and become the top issue for refiners — some of whom are buying millions of RINs on any given day. Industry officials are also using the price spike as additional ammunition to try to get Congress to either scrap or significantly modify the existing annual renewable fuels production mandates.

At a public meeting March 8 in Michigan on EPA’s proposed 2013 volume requirements for the renewable fuels mandate, Marathon Petroleum testified that corn ethanol RINs prices could amount to a 10-cent increase in gasoline prices.

The ethanol industry is vigorously pushing back at what it calls unfounded scare tactics by the refiners.

“You’re talking about tenths of a penny” per gallon, said Bob Dinneen, president of the Renewable Fuels Association, rejecting the higher industry estimate. “It’s not something that’s going to impact the consumer.”

Dinneen argues that the credits are being traded among oil companies — a win for some and a loss for others, but a situation that ultimately evens out.

“This is in my view an effort by the oil companies to create some hysteria to support their political effort to repeal the RFS,” Dinneen said.

Growth Energy CEO Tom Buis said refining companies making huge profits are just using the issue as an excuse to further restrict supply.

“If they want to blame gasoline prices on anyone, look in the mirror,” Buis said. “Don’t make us the scapegoat. They’re trying to blame us for something they’ve been doing for quite some time.”

Refiners are blaming the price rise on a “blend wall” they have long warned about, in which lower demand for gasoline clashes with the increased annual volumes of renewable fuels that they’re required to blend in gasoline. The mandate is rising toward the ultimate requirement of 36 billion gallons per year by 2022.

Refiners say they are forced, in turn, to purchase the more costly RINs to prove compliance with the mandate.

Ethanol backers counter the gasoline additive is cheap and plentiful — and that the oil industry is creating unfounded fears over a self-inflicted problem.

The ethanol industry says refiners can simply blend more ethanol instead of purchasing the RINs. Refiners counter that they won’t do so because of liability risks associated with blending beyond levels already deemed safe in older cars by EPA and automakers.