Even as the U.S. produces more oil than at any time since 1992, gasoline remains a dollar higher than the average for the past decade in part because of George W. Bush-era rules that attach a 38-digit Renewable Identification Number to every gallon of ethanol.
Gasoline prices at service stations have risen an average 12 percent this year even as benchmark West Texas Intermediate crude climbed 0.7 percent. Part of the reason is the 10-fold increase in the cost of credits that refiners from Valero Energy Corp. to Marathon Petroleum Corp. must buy to comply with the 2007 law designed to boost ethanol consumption.
Bush’s mandate predated a boom in oil and gas production that has helped the U.S. meet 84 percent of its energy needs in the first 11 months of last year, government data show, the most since 1991. Since its passage in 2007, annual gasoline demand has dropped 6.3 percent, while U.S. output has soared 28 percent, making compliance by refiners more expensive and eclipsing any benefit from replacing hydrocarbon-based fuel.
“It’s bastardized our markets off into some cosmic market that has nothing to do with supply and demand,” Peyton Feltus, president of Randolph Risk Management Inc., an energy-consulting firm in Dallas, said in a phone interview on March 5. “2007 was a very different energy world. There was so much demand for finished products.”
Crude production jumped to 7.16 million barrels a day as of March 8, the highest level since July 1992, driven by increased drilling in oilfields including North Dakota’s Bakken shale and the Eagle Ford in Texas, according to the Energy Information Administration.
Gasoline at the pump, averaged nationwide, has risen to $3.691 a gallon, or 15 percent higher than its December low, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. It has averaged $2.697 since 2003. WTI for May delivery fell $1.05, or 1 1 percent, to settle at $92.45 a barrel on the New York Mercantile Exchange. Brent crude, the global waterborne oil that more closely reflects prices paid by U.S. refineries, has dropped 3.3 percent this year.
The credits that refiners must collect to show compliance with the federal mandate are attached to each gallon of ethanol as it’s distilled or imported into the U.S. Ethanol is a form of alcohol indistinguishable from moonshine that’s created by fermenting and distilling the starches from corn, sugar, wheat and other crops. Most of the fuel in the U.S. is corn-based.
When the biofuel is combined with gasoline, the credits go to the blenders, which can use them if they also produce gasoline or sell them to other obligated parties if they don’t need them or have an excess.
Each credit has the Renewable Identification Number, or RIN, which the Environmental Protection Agency tracks. The RINs, which are traded among brokers, jumped to a record $1.06 a gallon on March 8 from 7.1 cents on Jan. 7, according to data compiled by Bloomberg. They cost 70.5 cents yesterday.
Complying with the mandate has become more difficult as the government boosted the total amount of ethanol that must be blended with gasoline by 53 percent from 2008, while motor fuel demand has dropped 15 percent from a 2007 record, according to refiners including Valero and Marathon. The gap means higher pump prices, refiners say.
“A dollar a RIN is 10 cents a gallon,” Bill Klesse, chief executive officer of Valero, the world’s largest independent refiner, said March 18 at the American Fuel & Petrochemical Manufacturers Conference in San Antonio. “It’s going to get passed on.”
Valero estimates its cost to comply with the Renewable Fuels Standard will be $500 million to $750 million this year.
Gasoline demand is projected to average 133.5 billion gallons in 2013 and 2014, the EIA, the statistical arm of the Energy Department, said in its March 12 Short-Term Energy Outlook. Under the 2007 energy law signed by Bush, the U.S. is required to use 13.8 billion gallons of ethanol this year and 14.4 billion in 2014. Ethanol is typically combined with gasoline in a 10 percent ratio, which is referred to as the blend wall.
Some auto manufacturers won’t offer a warranty if drivers use fuel with more than 10 percent ethanol, because of its corrosive properties, effectively capping how much refiners can blend at about 13.4 billion gallons for 2013, Charles Drevna, president of the industry group, 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.
Green Plains Renewable Energy Inc. Chief Executive Officer Todd Becker described the RINs surge as a classic short squeeze, a situation in which a lack of supply forces up prices, and that refiners have more room to consume ethanol without exceeding the blend wall. Becker said higher RINs costs aren’t having a measurable impact on gasoline and pointed toward record returns from refining the motor fuel from crude oil.
“There’s no way that RINs would add 10 cents to every gallon of gasoline,” Geoff Cooper, vice president of research and analysis at the Renewable Fuels Association, a Washington-based trade group, said in a March 19 telephone interview. Cooper said an additional 10 cents assumes that a RIN costs $1 and that all gasoline a refiner is selling contains no ethanol.
There are about 2.6 billion RINs carried over that can be used to comply with the law in 2013, the EPA said in a Federal Register posting on Feb. 7. As the program requires more blending next year, it’s “more likely” that the volume of ethanol to be blended will exceed the amount that can be mixed with gasoline, the agency said, and the number of carryover RINs into 2014 will “almost certainly” be lower than for 2013.
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.
Refiners and importers may use another 1.6 billion stored RINs this year and run out by 2014, Thomas Hogan, a senior vice president at Dallas-based Turner Mason & Co., a petroleum and refining consulting firm, said in a paper presented March 19 at the AFPM conference in San Antonio.
The jump in RIN prices is encouraging refiners to reduce imports of petroleum products that would increase the amount of credits they have to submit to the EPA and boost exports of the fuel, tightening domestic supply, said Michael Breitenbach, an analyst and trader at Blue Ocean Brokerage LLC in New York.
Ethanol supporters won a victory in January 2011 when the EPA granted a request from producers to raise the allowable amount of the biofuel in gasoline to 15 percent, known as E-15, for vehicles made after 2001.
“Continued strength in the RINs market for an extended period of time could hamper domestic supplies of refined products and increase cost for the consumer,” Breitenbach said. “Ethanol producers, on the other hand, are hoping that these RIN prices will act as a catalyst to jump start adaptation of E-15 in the retail marketplace.”
Congressional hearings may soon examine the RFS based on developments that have occurred since 2007, said Tim Cheung, a research associate at ClearView Energy Partners LLC in Washington. President Barack Obama in November 2011 ordered automakers to double average fuel economy of vehicles to 54.5 miles per gallon by 2025, shrinking gasoline demand.
Policy measures will likely be introduced because of the “political sensitivity of rising gasoline prices,” Barclays Plc said in a research note today.
This is all driving RINs prices higher as refiners need to purchase more of the credits, according to John Auers, senior vice president of Turner Mason.
“In 2014, we’re going to start hitting a wall and getting to a point where the regulators are calling for something that can’t physically be done,” he said. “This isn’t a short-term trend, the high prices aren’t going away.”