Skyrocketing ethanol credit prices pose problems for refiners

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Michael Bastasch DCNF Managing Editor
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A sharp rise in the price of ethanol credits has posed problems for U.S. refineries and stoked fears that refiners could export their fuel to avoid purchasing the renewable fuel credits.

Last week it was reported that the price of ethanol credits has surged more than 1,400 percent since the beginning of the year on concerns that biofuel production and use won’t meet federally mandated targets.

This increase in credit prices has stoked fears that refiners have reached the “blend wall” — the point at which the maximum amount of gasoline has been blended with 10 percent ethanol as required by law.

“The industry is clearly at the blend wall,” said Stephen Brown, vice president of government affairs for Tesoro. “Everyone I’m talking to is hitting the blend wall this year — some sooner than others — but we’re all hitting it this year.”

Platts reports that declining demand for gasoline and increased fuel efficiency mean the “blend wall” will be reached this year. In fact, some refiners may have already reached it.

“AFPM warned the White House a year ago that refiners would hit the blend wall in the not too distant future with the price of Renewable Identification Numbers sure to skyrocket,” said American Fuel and Petrochemical Manufacturers President Charles T. Drevna. “That future is now and if the situation persists, consumers can expect the cost of producing gasoline will continue to increase.”

High ethanol credit prices also give refiners an incentive to export more fuel out of the U.S. to cut costs.

“The additional cost of RINs provides even more incentive to export motor fuel,” reports the Oil Price Information Service. “One refiner that was all set to move some gasoline blendstock to Florida reportedly moved the cargo offshore, where the sale would not be impacted by the necessity to purchase some RINs.”

The Environmental Protection Agency requires a certain amount of renewable fuel to be blended into fuels on an annual basis. The agency assigns Renewable Identification Numbers, or RINs, to track if refiners have met government mandates for renewable fuel use. Companies that don’t use enough renewable fuel can purchase RINs to satisfy the mandate.

Ethanol production has fallen 16 percent from December 2011 to the beginning of March 2013, according to the Energy Information Administration. Bloomberg reports that on an annualized basis ethanol production will fall short of the federal government’s 13.8 billion gallon blending target for this year.

“With RIN prices this high, this is the sign we have been saying for a while would be indicative of companies showing they have real trouble trying to get past the blend wall,” said Patrick Kelly, senior policy adviser at the American Petroleum Institute. “It’s all the more reason why we’re going to be stepping up our efforts to repeal it.”

API recently won a court victory against the EPA’s renewable fuel mandate when a federal judge ruled that the agency could not mandate the use of cellulosic biofuels, which aren’t commercially available.

“This decision relieves refiners of complying with the unachievable 2012 mandate and forces EPA to adopt a more realistic approach for setting future cellulosic biofuel mandates,” API Group Downstream Director Bob Greco. “The court has provided yet another confirmation that EPA’s renewable fuels program is unworkable and must be scrapped.”

The RIN program has also been criticized as wrought with fraud. Since November 2011, the EPA has identified 140 million fraudulent biodiesel credits.

“The negative impact of diverting food from dinner tables to gas tanks, an unbreachable blend wall, mandates to use cellulosic biofuel that doesn’t exist, and a biodiesel market rife with fraud are tangible proof that the Renewable Fuels Standard makes no sense given our abundance of natural resources, is flawed beyond repair, and should be repealed,” said Drevna.

However, the agency has promised to address problems of fraud among biofuel credits.

“Following a number of high-profile RIN fraud cases, EPA expects its rulemaking to improve the overall liquidity in the RIN market and in particular make it easier for smaller renewable fuel producers,” said the EPA in a statement.

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