The Texas Whale

August 23, 2013 | Jim Lane

Too many oil companies bet on risky strategies for compliance with the Renewable Fuel Standard. Now, they turn to the US government for a bail-out on their obligations.

Judging that the government will cave in rather than risk disruption for the fuels markets.

In the game of chicken, who will blink first? Will the Texas Whale win out over cleaner air?

What is a RIN? Like a barcode, it identifies a gallon of qualifying renewable fuel — or, a purchased credit which an obligated party can submit in lieu of blending a wet gallon.

But that’s like saying that Fort Sumter, the site of the outbreak of the US Civil War, was a stone fort atop a rocky outcrop in Charleston Harbor.

The RIN is the symbol of a battle between the US Government and the US petroleum fuel industry — with the harried consumer caught in the middle.

You see, the price of a RIN is reflective of the balance between delivering renewable fuels — and buying credit to escape the obligation. For an obligated party, there are, as in the old Let’s Make a Deal, three doors to choose from.

Door #1. Buy available renewable fuels and distribute to an available market.
Door #2. Build capacity and build a market.
Door #3. Buy credits.

The government developed RINs as an relatively elegant alternative to its usual method — the unbendable mandate. For example, there’s no market in buying credits, as an automaker, to avoid the obligation to provide seat belts.

On fuel efficiency — consumers have no market in buying credits to avoid speed limits, which were imposed generally on US interstates in the early 1970s as a fuel economy measure — and only relaxed (and not universally) beginning in the 1980s.

There’s a temptation to see RINs as a cost imposed on the public by an uncaring government — but given that ethanol is a profitable, unsubsidized business, on the whole — and given that E85 ethanol is a profitable fuel to sell — RIN costs are the outcome of companies who have concluded that they have better options elsewhere for their capital. Which is to say, it’s not unusual for oil companies to build refining capacity and markets for the fuels.

Having said that, there’s no guarantee in economics that all obligated parties have equal ability to correctly surmise future opportunities. Some obligated parties are more long on their current RINs than others — judging, more correctly, that it was better to keep their exposure limited to the RIN markets.

It is the same for financial actors. For instance, in the 2000s Lehman Brothers made a series of relatively risky but highly profitable moves to increase their exposure to the mortgage market. Others, such as Wells Fargo, declined to take on such an exposure. In time, the creative destruction of the markets decided which companies were to survive, which companies were to be absorbed or disappear.

In the same way, elevated RIN exposure — to the extent that it portends problems for consumers, is a problem for government and for the EPA, as steward of the Renewable Fuel Standard. But to the extent to which it has exposed companies that have simply gone long on the Texas Whale strategy, well, we all await the outcome.

The Texas Whale strategy?

a. Minimally comply with the Renewable Fuel Standard.
b. Build little or no capacity, build no market for higher-blend ethanol fuels.
c. When RIN prices inevitably soar, blame the Renewable Fuel Standard and try to get it repealed.
d. Failing repeal, threaten to boycott the US market as a means of reducing RIN obligations, and thereby creating a fuel crisis that, hopefully, can be hogtied to “government intervention into free markets”.
e. Scare the heck out of lawmakers to make them think they will be blamed for soaring fuel costs.

Will it work? Time will tell.