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Operation Deathanol, RINs, and the selling of the fossil fuels story

| March 19, 2013

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Read any stories about renewable fuels lately in mainstream media? Bet they’re bad ones.

Here we look at the latest chapter in the “death to all renewables” propaganda war.

If you are a reader of the New York Times, you might have noticed this story recently, leading with “A glut of ethanol in the gasoline supply is threatening to push up prices at the pump…”.

Accordingly, you may well be primed for a shock wave of gasoline price increases and prepared to declare jihad and commit violence on ethanol producers for causing it.

Well, let me save you some upcoming prison time on mayhem charges. The wholesale price of gasoline jumped 43 cents from January to February. The impact that ethanol is having is, ahem, about $0.007.

YOU: So, you’re telling me that wholesale gas prices jumped 43 cents, and the ethanol impact was less than one cent. And that prompted the New York Times to lead an article with “A glut of ethanol in the gasoline supply is threatening to push up prices at the pump…”. WTF?

ME: Yep. Here’s the real story.

BACKGROUND: The market price of ethanol last week was around $2.75, or a discount of around $0.25 per gallon to wholesale gasoline. So, the New York Times is not literally referring to the physical world of gasoline and ethanol when it talks about ethanol creating pain at the pump. The Times is referring to the shadowy world of Renewable Identification Numbers, or RINs.

RINs – a 60-second primer

For those new to the dark arts of the RIN world, it’s a lot like frequent flyer miles.

You know how, if you’re enrolled in an airline program, each time you fly you get the physical seat for those physical miles, and you also acquire those valuable “frequent flyer miles” that you can bank for a rainy day.

Some times, you might be flush with cash or airfares are cheap, so you buy physical miles and bank frequent flyer miles. Other times, airfares are ridiculous, so you cash in frequent flyer miles in lieu of paying cash.

In the same way, every time a gallon of renewable fuel is produced or imported into the US, the buyer acquires the physical gallon, plus a valuable Renewable Identification Number, or a RIN. Essentially that’s a barcode identifying it as a qualifying renewable fuel.

Obligated parties (e.g refiners) have to acquire and submit, each year, a mandated number of RINs to the EPA. That, in a nutshell, is the mechanism of ensuring that low-carbon renewable fuel is used.

Some years, renewable fuel producers make a lot of fuel, and obligated parties can buy and bank the extra RINs for a rainy day. Some years, producers make less fuel and obligated parties use surplus credits to make up the shortfall — or they buy them on the spot market, or directly from the EPA.

The 2013 RIN Market

What’s happening this year? Well, because the 2012 drought has spiked US corn prices, this is going to be one of those years where producers make less fuel.

At current production rates, we are expecting ethanol producers to make 12 billion gallons of fuel this year — and with that, 12 billion RINs will be available. The mandate this year is for obligated parties to present 13.8 billion RINs. So there’s a 13 percent shortfall.

That’s what this is all about. 1.8 billion RINs.

What does a RIN cost? About a year ago, they were running a nickel. Right now, they are trading at $1.15, according to the Digest’s spot checks. As a refiner, your general level of happy relates directly back to the amount of RINs you have banked in your account. Just like an airline customer who neglected to bank frequent flyer miles when they were cheap.

The impact

So, what’s the real impact? Here are three potential outcomes.

Door number one. 100% of obligated parties bought in a panic at the top of the RIN market this week after doing no RIN purchases when they were cheap. Total cost is $1.15 per RIN X 10 percent blending rate into gasoline X 13 percent coverage. That’s $0.014 per gallon of gasoline sold in the US.

Door number two. 0% of obligated parties bought in a panic at the top of the RIN market because they banked RINs when they were cheap. Total cost is $0.05 per RIN X 10 percent blending rate into gasoline X 13 percent coverage. That’s $0.00065 per gallon of gasoline sold in the US.

Door number three. For our own impact analysis, we’ve split the difference — assumed that 50 percent of obligated parties were shrewd operators buying RINs when they were cheap, and 50 percent were panicked buyers buying RINs at the last minute at the top of the market. Total cost is $0.014 + $0.00065 divided by 2. That’s $0.007325. Seven tenths of a cent.

RIN prices and gasoline prices (reprise)

What’s the average volatility of the wholesale gasoline price again? Over the past six months, the average price has fluctuated $0.21 per month. From January to February, the price jumped 43 cents. In other words, you wouldn’t even notice seven-tenths of a cent; it is buried beneath ordinary gasoline price volatility.

Except for one thing. People don’t like pain at the pump, and look for a fall guy. And guess who’s been chosen?

So, here’s your exit.

Myth. $1.15 RIN at a 10% ethanol blend increases gasoline costs by $0.115 per gallon. Big change.

Reality. $1.15 RIN at a 10% ethanol blend increases gasoline costs by $0.0073 per gallon. Impossible to notice change.

Now, ask yourself, why are you reading myth in the New York Times, and who made sure you did? As was advised in All the President’s Men, “follow the money.”

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