Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Carl Icahn is always unpredictable.

But I think Icahn might have outdone himself this week in an interview with Bloomberg TV when he quoted the head of the refining company he controls, CVR Energy, as saying that "if Pablo Escobar were alive, he wouldn’t be doing coke, he’d be trading RINs."

Get it? Pablo Escobar! He's the guy who made so much money in the flush days of the cocaine trade that he built a hacienda featuring its own sculpture park, private airstrip, bullring, cart-racing track and zoo (the hippos from that zoo ended up roaming the Colombian countryside, unattended). 

In other words, "renewable identification numbers," or RINs, are so lucrative that drug dealers would swap jobs to trade them.

Icahn doesn't like RINs, mind you. He just knows that they're lucrative -- and that they make about as much sense as lost hippos wallowing in a Colombian river.

RINs are essentially certificates used to prove that a gallon of gasoline has been blended with ethanol or biofuel --  as federal regulations require. The burden of compliance in this renewable energy push falls on refiners, even though many of them don't actually blend all the fuel they produce (it is often done, instead, by wholesalers and marketers).

So refiners have to purchase RINs on the open market to prove that they've done their regulatory duty, leaving them at the mercy of sellers who know they have a captive set of buyers. The need to fix this "rigged" market -- a depressingly familiar term in this election year --  was the subject of a letter Icahn sent to the EPA last week.

RINdignation was a fairly consistent theme on second-quarter earnings calls across the entire refining sector. Refiners are fed up with this game, and here's why:

RINtolerable
Average RIN prices have climbed back to their highest level in almost 3 years
Source: Delek US Holdings

Compliance costs for refiners are increasing, partly because gasoline demand isn't rising fast enough to absorb the increasing volume of biofuels mandated by law to go into every gallon of gas. Refiners have to buy RINs to cover the gap that creates -- and the bill for doing so has surged.

Biohazard
The cost of buying RINs over the last 12 months was almost two-thirds higher than in 2014
Source: Company filings, call transcripts, Barclays
Note: Not all refining companies report their RIN costs consistently; hence this survey of 7 of them.

Still, while the overall cost has certainly gone up, it's not much higher than in 2013. The difference is that refining margins overall have come down since then. The average 3:2:1 crack spread -- a proxy for margins -- was almost $29 a barrel in the first half of 2013 versus about $16 in the same period this year.

So the RINs burden is heavier, equating to 13.5 percent of operating profit in the last 12 months versus 12 percent in 2013.

What's more, in a development that would no doubt resonate with the businessman who Icahn wants to be president, it's the little guys that are really getting hit. Strip out the big two refiners from the survey noted above, Valero and Marathon, and the burden on the smaller refiners has soared -- to 29 percent of operating profit in the last 12 months from 18 percent in 2013.

Icahn, as you might suspect, is faring even worse in all this. Here's what's happened with CVR Energy, the refiner he controls.

Icahn Bear It
RIN costs are now a huge burden on CVR
Source: Company filings, Bloomberg
Note: RIN costs as a proportion of operating profit.

Icahn makes no secret of the fact that he has a dog in this fight. As I wrote here, this all comes alongside rumors that he wants to buy Delek US Holdings and merge it with CVR Energy.

Scale could potentially provide some financial refuge, because getting regulatory relief looks like an uphill battle.

Surveying the political landscape in a report published last month, Washington-based consultancy ClearView Energy Partners concluded the House leadership was unlikely to force a vote on reforming the renewable fuel standard (largely because it's a potentially divisive topic for a Republican party eager to demonstrate unity).

That could change if RINs prices were to surge above $1 apiece and stay there. But Icahn, or anyone else long refining, shouldn't bank on outrage over escalating costs forcing Washington's hand. Congress is one of those few places where the old maxim about something unsustainable eventually having to stop doesn't necessarily apply.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(An earlier version of this column stated CVR Energy owns 48 percent of Alon USA. That stake is owned by Delek US Holdings.)

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Timothy L. O'Brien at tobrien46@bloomberg.net