INSIGHT: US RIN values rise on looming blend wall

09 April 2013 22:43  [Source: ICIS news]

HOUSTON (ICIS)--In December 2012, US renewable identification numbers (RINs), the credits refiners use to meet government mandates for blending ethanol into the gasoline pool, were trading at barely a penny each.

RIN prices have skyrocketed since, climbing to more than $1/credit in March. RINs have recently been trading in the 70s cent/credit range.

This spike in prices has even prompted Congress to investigate the issue.

Prices have been on the rise as refiners brace for a looming shortage of RINs as a result of the so-called blend wall.

The blend wall is the point at which the production of gasoline declines to the level where the renewable fuel standard (RFS) is more than 10% of the total gasoline pool.

Blending ethanol at higher than 10% may cause harm to vehicles made before 2001, according to manufacturers.

In 2012, the RFS required refiners to blend about 13.2bn gal of ethanol into the gasoline pool. They blended slightly more at 13.3bn gal, right at 10% of total gasoline production, which was 133bn gal.

For 2013, the requirement is even higher at 14bn gal, which would require refiners to produce 140bn gal of gasoline to keep the blend at 10%.

But gasoline demand has been on the decline for almost five years

It's a prospect that has refiners crying foul because gasoline demand has been steadily falling since 2008.

"The right thing to do is couple the RFS, if you're going to have one, with actual gasoline demand," said Valero spokesman Bill Day.

In addition to its refining and retail businesses, Valero has 10 ethanol plants, three of which were recently restarted after thin margins forced the company to idle production.

Last year’s drought devastated the corn crop, sending corn prices soaring and ethanol plant margins reeling.

Corn prices have since weakened, and ethanol plants are beginning to restart.

Day said the RFS was created before the financial meltdown of 2008, when gasoline demand was soaring. That's no longer the case.

"The RFS has gone up while gasoline demand has gone down," he said. "Now there's no relationship at all."

On the contrary, Bob Dineen, the president of the Renewable Fuels Association (RFA), said in recent report to Congress that changes to the RFS are not necessary.

The program is working exactly as it was designed, he added.

Dineen said the RFS needs to stay in place so it can work as intended, “creating the economic incentive for gasoline marketers to install the infrastructure necessary to blend E85, E15 or other higher blends. Today’s market for RINs will provide that incentive".

“The RFA fundamentally and vehemently does not believe changes need to be made to the RFS to address the blend wall,” Dineen said. “The original legislation, which included a dynamic credit trading mechanism, will drive the innovation needed to scale the blend wall as long as Congress leaves it in place.”

Day agreed with Dineen and the RFA that widespread adoption of E85 would help eliminate the blend wall. But infrastructure is not currently in place, and it could takes months and years for retail stations to upgrade fuel pumps, Day said.

In the short-term, Day said, exporting gasoline and other products can help keep refinery margins in the black, helping to absorb the added cost of RINs.

Valero exports about 8% of its gasoline and 15-18% of its distillates.

“A vast majority of our products stay in the US,” Day said. “What you see exported is the stuff we produce above demand for gasoline and diesel.”

Fuel exports have increased in recent years as domestic demand for fuel has dipped.

Day said it will be the consumer who ultimately pays for the added costs associated with higher RIN prices. Some analysts have estimated that these inflated RIN values cost the consumer up to 10 cents/gal at the pump.

Dineen disputed that claim, citing a study by Informa Economics that said RIN costs have only increased retail gasoline prices by 0.40 cents/gal.

By: Bobbie Clark
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