Beautifying Renewable Fuel Markets with Creative Hedges

How frequent flyer miles help smooth volatile markets

If you think through how this market is working for the airlines, they are raising capital today from end users by selling tomorrow’s inventory. Frequent flyer miles can last for years, as long as a flyer keeps an account active — and in this way, miles purchased in 2013 might not actually be used for months, or even years.

If you think through how this market is working for the traveler, they are using capital to buy future inventory that they can use to solve short-term supply-and-demand problems that pop up in the travel markets.

It may seem a little far-fetched to compare the volatility of airfares to RIN volatility — but everyone knows that airfares are volatile, and that frequent flyers readily give capital to airlines in order to have (through miles) a mechanism for hedging their exposure to that volatility. This hedging mechanism keeps travelers flying, keeps markets operating, and helps finance airlines.

At the same time, everyone knows that RIN prices are volatile. It’s not completely far-fetched to suppose that obligated parties would give capital to renewable fuel producers in order to have (through SuperRINs) a mechanism for hedging their exposure to that volatility. This hedging mechanism keeps refiners producing, keeps markets operating, and helps finance advanced biofuels.

In both cases, hedging creates stability, and stability supports increased capacity.

The problem of obligated parties is that they don’t have the kind of hedges available to them that they should — and reduction of economic activity is the inevitable result. Just as frequent flyers, if they had no way around a $2000 one-way airfare to New York, would probably just not fly.

In today’s Digest, we look at how other hedges and market catalysts might and should emerge. All via the page links below and our extended coverage today on RINs, RINsanity, and the financing of advanced biofuels.