USA Refiners Face Higher Biofuel Credit Prices
(Bloomberg) -- Here’s the latest sign of America’s recovery from the pandemic: the market for obscure biofuel credits known as Renewable Identification Numbers is taking off.
Oil refiners that make gasoline are required by law to blend biofuels with it, but if they don’t, they can meet their federal quota by buying so-called RINs. Soon, as pandemic-weary Americans hit the road and plan summer vacations, there may not be enough RINs to go around. That’s causing the price of such credits to surge.
“It’s as simple as toilet paper during Covid,” Justin Dirico, a principal at New York-based Blackstar Markets, said in an interview. “If everyone thinks there is a massive shortage, there could be a stockpiling of RINs like there was hoarding of toilet paper.”
Biofuels may see something of a renaissance in 2021. It’s not just Americans getting Covid vaccines and taking road trips again that’s pushing up prices for the credits. President Joe Biden has a sweeping climate agenda that signals a push away from fossil fuels. The administration may require more biofuels to be blended into gasoline and force more small refineries to satisfy the quotas, a shift from widespread exemptions under former President Donald Trump.
Tight supplies are also adding to the higher prices. Ethanol output is about three-quarters of what it was a year ago, and while biodiesel production is up, it’s being squeezed amid shortfalls of the oils, fats and greases needed to make it.
So-called D6 RINs, which track ethanol blending in gasoline, have climbed from 17 cents a year ago to $1.415, the highest since December 2016. D4s, representing biodiesel and renewable diesel, have more than tripled in 12 months as demand soars.
“We fail to see the argument for anything approaching this price range to be considered sustainable,” said Height Capital Markets in a research note for clients Wednesday.
Part of the run-up may be driven by refiners that anticipated relief under the Trump administration and are now seeking to buy credits to fulfill 2020 biofuel-blending quotas, Height analysts said.
Gasoline demand in the U.S. has been steadily rising since the Texas freeze kept drivers home by the millions in mid-February and is now approaching levels seen before the pandemic. Several factors have edged gasoline prices higher, including refinery closures amid the cold spell, higher costs for crude and climbing demand.
There’s a debate over how much biofuel credits influence consumer prices. Some independent refiners argue they need exemptions to keep prices down, but biofuel producers argue the waivers undercut demand for their product.
Gasoline prices averaged $2.88 nationwide, according to AAA on Wednesday.
Pricey RINs are a damper on oil refiners’ profits. Last week, a gauge of the cost of complying with the Renewable Fuel Standard for refiners jumped to the highest since 2013, when Argus Media first began tracking the figure.
The dilemma is politically sensitive given the number of refiners in Pennsylvania and Delaware, both places where Biden has roots.
Oil companies are already warning the Environmental Protection Agency of a possible RIN shortage and lobbying the agency to reduce biofuel-blending requirements for 2021 and 2022.
Current biodiesel production data indicate there won’t be enough RINs to meet demand, the American Fuel and Petrochemical Manufacturers told newly installed EPA Administrator Michael Regan in a letter Monday.
“If EPA maintains biofuel volumes for 2021 even at the same levels as the previous couple years, it will be impossible for refiners to comply using RINs generated by physical blending,” AFPM president Chet Thompson told Regan.
The industry faces “a RIN crisis,” Thompson added. “A depleted RIN bank and soaring credit costs will pose unprecedented challenges.”
The former Trump administration never made a proposal for biofuel blending requirements for 2021 amid a politically fraught election in which both ethanol and oil states were in play.
Now, Biden’s EPA is considering taking the unusual step of addressing two years at once when it proposes blending quotas this spring, right as the U.S. Supreme Court reviews exemptions for small oil refineries, according to industry officials with direct knowledge of the situation who asked not to be identified because the information isn’t public.
The EPA aims to issue final requirements for both 2021 and 2022 by the legal deadline of Nov. 30, the people said.
EPA spokesman Nick Conger said the agency is still looking at its options.
--With assistance from Jeffrey Bair and Michael Hirtzer.
© 2021 Bloomberg L.P.
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