Ethanol Upending Refiners Pushes $13 Billion on U.S. Drivers
Stock Chart for Valero Energy Corp (VLO)
U.S. drivers may face a $13 billion increase in the cost of gasoline this year as the price of federally mandated ethanol credits has risen 10-fold for oil refiners including Valero Energy Corp. (VLO) and CVR Energy Inc. (CVI)
Fuel processors such as Valero, the world’s largest independent refiner, and Exxon Mobil Corp. (XOM) are pushing the U.S. Environmental Protection Agency to reduce the amount of ethanol they’re required to add to gasoline to avoid what they say will be a sharp spike in prices at the pump just as the summer driving season begins.
Refiners buy biofuel credits, known as RINs, which are available as an alternative to actually blending ethanol into gasoline. The cost of those credits has ballooned from 7 cents at the start of the year to more than $1 as the 2013 federal mandate for biofuel exceeds 10 percent of gasoline sales, the maximum that refiners say the market can absorb.
Energy traders and hedge funds are treating ethanol credits like “a casino,” Michael Jennings, chairman and chief executive officer of Dallas-based refiner HollyFrontier Corp., said at the annual gathering of the American Fuel and Petrochemical Manufacturers in San Antonio today. “It will drive, in its current form, higher prices at the pump.”
Companies that blend gasoline and ethanol are also buying and holding on to the credits, expecting prices to go higher and making them harder to get, Valero Chairman and CEO Bill Klesse said in an interview yesterday at the refinery group’s meeting.
“You have traders hoarding,” Klesse said. “The EPA has to address it and address it now.”
Concern about the rising cost of the credits has driven down refiners’ share prices, draining $5 billion in market value last week from the 10 largest publicly traded U.S. independent refiners, according to Barclays Plc.
Consumers are at risk of paying 10 cents a gallon more for gasoline this year if the ethanol credits continue to sell at a price of more than $1, Roger Read, a Houston-based analyst for Wells Fargo & Co. (WFC), said in a March 11 note to investors.
Pump prices may surge even more as the credits make imports more expensive and create an incentive for U.S. refiners to seek export opportunities where no ethanol blending is required, Read said.
“The likely impact for U.S. consumers is higher gasoline prices as supply declines,” he wrote.
The high cost of credits may add 10 cents to the price of a gallon of gasoline, Valero’s Klesse said. An increase of 10 cents for every gallon of gasoline consumed in the U.S. in 2013 would equate to more than a $13 billion cost to consumers, according to data compiled by Bloomberg.
Refiners can make use of surplus RINS and the added cost of high credit prices is likely to be smaller and may be as low as $400 million, Geoff Cooper, vice president of research and analysis at the Washington-based Renewable Fuels Association, said today in an interview.
“It’s a market like any other,” Cooper said. “It’s going to respond to demand, and I think what we saw last week when prices jumped over a dollar was some panic buying.”
Prices at that level don’t reflect market fundamentals and the cost is expected to average 31 cents this year, he said.
The rising cost of credits will be negative for refiner earnings in the “best case” and “in the worst case could take down both the U.S. consumer and the domestic economy,” Chi Chow, an analyst at Macquarie Group Ltd. in Denver, said in a March 13 note to clients.
Valero, which is also among the country’s top ethanol producers, plans meetings with members of Congress and agency officials this week to discuss potential changes to the Renewable Fuel Standard, part of a 2007 law that requires the blending of biofuels, said Bill Day, a company spokesman.
The agency is accepting public comments on the fuel standards until April 7, and then will review the comments before deciding on any potential revisions to blending requirements next year, according to an e-mailed statement.
As the amount of gasoline the U.S. consumes has declined, refiners are unwilling to blend fuel with more than 10 percent ethanol to meet the federal requirement. For an alternative to blending ethanol, refiners buy credits called Renewable Identification Numbers, or RINs, to cover part of the requirement.
Some auto manufacturers won’t offer a warranty if drivers use fuel with more than 10 percent ethanol, effectively capping how much refiners can blend at about 13.4 billion gallons for 2013, Charles Drevna, the industry group’s president, said March 17 at the conference. That’s 400 million gallons less than the government mandate, raising demand for RINs to make up the difference.
The price for RINs rose to a record $1.06 on March 8 and closed at 77 cents yesterday, up from 7 cents on Jan. 8, according to data compiled by Bloomberg.
The law allows blenders of the fuel, such as owners of retail gasoline stations and storage tanks, to be granted RINs that they can sell to refiners or traders. Blenders have seen profits from selling RINs soar amid the runup in prices, Jack Lipinski, CEO of refiner CVR Energy Inc., said in an interview at the conference.
“The intent of the law was to assure ethanol was blended,” he said. “RINs should not be a separate profit center.”
Lipinski and Klesse said the government should consider making the companies that blend the fuels before selling them to retail stations responsible for proving they’re meeting minimum ethanol use requirements, a short-term solution that may quickly force down RIN prices.
Exxon favors capping the amount of ethanol mandated for blending at 10 percent of gasoline demand, Bill Colton, vice president for corporate strategic planning, said last week.
Drevna and refining company Tesoro Corp. favor a complete repeal of the Renewable Fuel Standard, a prospect that may become more probable as gasoline prices rise due to the cost of RINs, Paul Sankey, an analyst with Deutsche Bank AG in New York, said in a March 12 note to clients.
“The train is getting ready to leave the station,” Stephen Brown, vice president of government relations for Tesoro, said in an interview yesterday at the conference. “Reform is going to come to the market.”
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