Ethanol RIN-Sanity

As climate change becomes a hotter topic, various governments have taken steps to introduce renewable energy sources into their domestic consumption. The problem with ethanol is that while it is a viable energy source, it also courts controversy by affecting corn prices in developing countries and subsequently world food prices. Nonetheless in 2007, the US government introduced the RINs market to facilitate the use of more biofuels (typically ethanol or biodiesel) in the USA. The 2007 Energy Independence and Security Act had set levels for various types of renewable fuels that have to be blended with US gasoline and diesel fuel, with the required levels of biofuels increasing steadily from 2008 until 2022. By 2022, 35 billion gallons of ethanol and 1 billion gallons of biodiesel fuel are to be blended with U.S. motor fuel. 

The mechanism to ensure the required levels of blending are reached is the Renewable Identification Numbers (RINs) and the US Environmental Protection Agency (EPA) oversees them. RINs are actually just a 38-digit identification number. RINs also have expiration dates. RINs have their own value to reflect the changing economics of blending biofuels with gasoline and diesel fuel. RINs are issued at the point of biofuels production or import and then the RINs must be reported to the EPA. When biofuels are sold, the RINs are transferred too. The refiners, importers and blenders that buy the biofuels and RINs must then blend a portion of their gasoline or diesel fuel with the biofuels. After the biofuels are blended into the gasoline or diesel fuel, the refiner, importer or blender sends the RINs to the EPA to evidence compliance with their company’s Renewable Fuel Standards (RFS). In years when biofuels blending exceeds the required level in the industry as a whole, as has happened with ethanol in the past couple years, the excess RINs that are generated can be used to offset blending shortfalls in future years. These excess RINs can be sold or bought by other refiners and blenders to use as credits against their Renewable Fuel Standards. The alternative is for the current owners of the RINs to hold them to use in future years. This system allows refiners and blenders to buy excess RINs when their costs of blending are higher than the cost of purchasing the RINs. In the past few years, the ethanol industry has produced more ethanol than required and therefore excess RINs have been issued. A swap market has also developed for RINs.

A Bright Future for Speculators but not for American Families

Since January 2013, ethanol RINs have gained 1,400% due to oil refiners and fuel blenders worrying they will be unable to meet their ethanol blending mandates with physical supply. Prices are 110 cents per ethanol RIN, up from 5 cents per ethanol RIN at the end of 2012. On the supply side, high corn prices and weak petrol demand in the USA has forced some ethanol refiners to shut down plants. US ethanol production is estimated to be around 12.3 billion gallons in 2013, which would be insufficient to meet the EPA’s requirements for this year. This year the EPA requires blending 13.8 billion gallons of corn-derived ethanol with gasoline and diesel fuel. However, currently most fuel wholesalers sell their petrol blends with 10% ethanol content and combined with US gasoline and diesel fuel demand remaining flat at 134 billion gallons this year, this means that demand of 13.4 billion gallons of ethanol will fall below the requirements of the EPA. Therefore ethanol supply has tightened at the same time as demand has weakened for petrol and increased for RINs as speculators enter the secondary market to exploit profit opportunities with demand likely to grow. Furthermore, cash-rich international oil companies have been buying excess RINs from blenders and refiners to ensure compliance with the RFS, all of which has increased the likelihood that the “blendwall” is nigh – the time when the maximum amount of the US petrol pool has been blended with 10% ethanol.

It is likely that RIN prices will continue increasing due to a variety of factors:

·         Only a small minority of cars in the USA can burn ethanol blends with greater than 10% ethanol content;

·         The refineries and blenders are still developing the equipment to provide higher blends than 10% ethanol content;

·         US gasoline and diesel fuel consumption, and consequently, demand is in long-term decline;

·         The 2007 Energy Independence and Security Act already fixed the required levels of biofuels to blend with gasoline and diesel fuel for every year until 2022 – there was no room for flexibility in setting these levels.

Therefore as there is a 10% cap on the ethanol content and falling demand for petrol consumption, meeting the RFS is only possible by purchasing RINs. Thus entering the RIN market looks attractive at least for the remainder of 2013. It is easy to trade RINs – one merely has to register with the EPA and create an individual account on the EPA’s Central Data Exchange. Higher RIN prices are also boosting the price of gasoline for retail consumers as ethanol is a mandated component for retail gasoline, so speculating on gasoline prices is also an attractive proposition.

However, in the longer-term we must watch for developments that could alter the fundamental support for RIN prices:

·         A more rapid expansion of ethanol blending with petrol of 15% ethanol content would expand the “blendwall” and reduce demand for ethanol RIN credits to meet the RFS;

·         Lobbying Congress to renegotiate the RFS would reduce the mandated levels for biofuels and so would also reduce the demand for ethanol RIN credits.