The NY Times continues to probe the vast power of Wall Street with an article an tradeable ethanol credits (aka 'RIN'), which are tied to the blending of ethanol into gasoline. Their gist - Big Oil lacked the market power and political savvy to fend off the predators of Wall Street and now needs our help as they stick up the little guy stick-up for the little guy at the pump. I kid you not.
Careful readers of the story (a group that seems to exclude Times editors) will learn that the real problem is a poorly designed market for ethanol credits. Apparently, blame can be assigned to Bush and Congressional Democrats, although I note that Bush has been gone for a while and someone new is at 1600. The Department of Energy chimed in last June with a very different take from the Times as well. Interested folks might also peruse this Bloomberg story or this Biofuels Digest long look at the politics of reform or repeal.
Let me try to extract the key bits from the Times story:
The federal government created the market in special credits tied to ethanol eight years ago when it required refiners to mix ethanol into gasoline or buy credits from companies that do so. The idea was to push refiners to use the cleaner, renewable fuel, or force them to buy the credits.
The market design barely nodded to the laws of chemistry and physics:
As a result, refiners this year began hitting what is known as “the blend wall,” meaning that the amount of ethanol the government is requiring them to use is close to the maximum amount that can be blended into gasoline without creating problems for gas stations and motorists.
Distributing gasoline with greater levels of ethanol is more costly and corrodes gas station pumps and tanks. Raising the ethanol level in gasoline, therefore, would require gas stations across America to install new systems. Therefore, refiners have turned to RINs to meet their government obligations rather than blend more ethanol into gasoline.
So there is a practical limit to the maximum amount of ethanol that can be blended into gasoline, and that will depend on the total amount of gasoline consumed. And since RINs are created by blending physical ethanol with physical gasoline, if less blending occurs fewer credits will be generated.
So how did the bright lights in Washington handle that?
The RINs story began in 2005, when the Bush administration joined Democrats in Congress to pass an energy bill mandating renewable fuel standards. That law was broadened in 2007 to establish requirements for the amount of biofuel to be blended into gasoline annually through 2022. This year, refiners and importers are required to blend 13.8 billion gallons of ethanol, up from 13.2 billion last year. For 2014, the figure is 14.4 billion.
But the estimates Congress used about how much gas Americans would keep buying were wrong. When the biofuel credits were created, gasoline consumption was projected to grow 6 percent by 2013. But thanks in large part to the recession and more fuel-efficient cars, consumption has actually fallen.
So gas consumption is down, which seems like a win for the Green Team. But the law is written as if reduced gasoline consumption is a defeat, since it requires refiners to mix in a total amount of ethanol that would only make sense if aggregate gas consumption was much higher. The result is a predictable combination of higher prices for the credits and squealing from the market participants seeking regulatory relief. The Times has a graph of the price action here; the prospect of regulatory relief for 2014 has brought prices down. The E.P.A. seems to grasp the problem:
Officials at the E.P.A. do not see excessive influence by financial speculators. They suggest the price spikes in RINs this year reflect the expectation of a shortage of the credits because rising renewable fuel mandates are occurring as consumer demand for gasoline is falling. “The market is expecting this future scarcity as the statutory mandates continue to increase,” Mr. Grundler said.
Most of the article blames Wall Street for this and that, because we all know that Big Oil is a pitiful, helpless giant whose players are fundamentally motivated by philanthropy.
Even beyond the likely rise in gasoline prices, critics of the RINs market say it is deeply flawed, and they do not share Ms. Oge’s optimistic takeaway of this year’s market frenzy.
First, by allowing anyone to trade, including those with no real interest in energy, the E.P.A. encouraged speculation, the critics say. Second, the market operates largely in the dark, leaving it vulnerable to manipulation. Third, and perhaps most significant, the federal requirement for ethanol in gasoline means oil companies are captive buyers — meaning they are required to buy the credits when they do not or cannot blend their own fuel — a fact that savvy traders use to their advantage.
First, what is "speculation"? Anyone, including Wall Street firms and energy market participants, could have foreseen a problem when gasoline consumption fell well below projections without an offsetting reduction in ther requirement for blending credits. A shortage of credits was utterly predictable, from which it followed that price hikes, complaints of hoarding, and lacklustere reporting were all utterly predictable.
The utter opacity of the market is not helpful and the EPA ought to address that. One wonders whether a formal futures market could be sustained; my guess is that this RIN market is too artificial and subject to regulatory whim, but who am I?
As to "the federal requirement for ethanol in gasoline means oil companies are captive buyers", well, yeah. The link between total gasoline consumed and total ethanol blended ought to be rethought. Having a target based on projections from 2007 that are already obsolete seems to be sub-optimal. Unless part of the goal was to assure the ongoing vakue of the professional politican fix-it class.
And help may be on the way, based on this recent rerport:
In contrast, in 2014, EPA acknowledges that the carryover credits likely will not be sufficient to avoid the blend wall, as the statutory volume requirement increases significantly. EPA states that it will propose adjustments to the 2014 volume requirements, and that it believes it has the “authorities and tools needed to address these challenges.” However, EPA does not specify the measures it will take. In addition to EPA’s authority to reduce cellulosic and advanced biofuel volumes, and the resulting total renewable fuel volume, EPA has statutory authority to grant a waiver of the total renewable fuel requirements themselves, if EPA determines there will be severe economic hardship. EPA has denied prior petitions for waivers with language that sets a high bar for making the hardship determination. In light of that precedent, the increasing volumetric requirements of the statue and continuing decrease in gasoline demand, it is not clear how much relief EPA will be able to provide without overriding its own precedent.
And this is kind of funny, for those who find this sort of thing funny. Note the orderly market regulation (my emphasis):
Last week EPA finalized the Renewable Fuel Standard (“RFS”) levels for 2013. Although EPA missed the statutory deadline of November 30, 2012, for setting levels for the 2013 RFS, EPA notes that the statute does not provide any penalty for missing the deadline, nor does it remove the general requirements of the RFS if the deadline is missed. In light of the significant delay, EPA has extended the deadline for obtaining sufficient credits for gallons of ethanol equivalent fuels (known by the term Renewable Identification Number, or RIN) from February 28 to June 30, 2014. EPA also intends to meet the statutory deadline of November 30, 2013 for the 2014 standards, and therefore will have released the 2014 standards well in advance of the 2013 compliance deadline. This will allow obligated parties to make informed decisions about their 2013 compliance strategies, such as whether to use banked RINs, or save certain RIN categories for 2014 compliance.
So by August 2013 the EPA had finalized the rules for 2013, a mere nine months late. Whatever.