Ethanol Helps Inflate Gas Price
Fuel Spike Comes Amid Oil Boom
Driver Shawn Davis of Sorlie Trucking loads a tanker trailer with ethanol at Great River Energy’s Blue Flint Ethanol plant in Underwood, N.D., in 2012. Gas prices have risen an average 12 percent, partly because of the 10-fold increase in the cost of credits that refiners must buy to comply with the 2007 law designed to boost ethanol consumption. Illustrates ETHANOL (category f) by Mario Parker © 2013, Bloomberg News. Moved Thursday, March 21, 2013. (MUST CREDIT: Bloomberg News photo by Daniel Acker).
Chicago — Even as the U.S. produces more oil than at any time since 1992, gasoline remains a dollar higher than the average for the past decade in part because of George W. Bush-era rules that attach a 38-digit Renewable Identification Number to every gallon of ethanol.
Gasoline prices at service stations have risen an average of 12 percent this year as benchmark West Texas Intermediate crude climbed 1.2 percent. Part of the reason is the 10-fold increase in the cost of credits that refiners must buy to comply with the 2007 law designed to boost ethanol consumption.
Bush’s mandate predated a boom in oil and gas production that has helped the U.S. meet 84 percent of its energy needs in the first 11 months of last year, government data show, the most since 1991. Since its passage in 2007, annual gasoline demand has dropped 6.3 percent while U.S. output has soared 28 percent, making compliance more expensive for refiners and eclipsing any benefit from replacing hydrocarbon-based fuel.
“It’s bastardized our markets off into some cosmic market that has nothing to do with supply and demand,” Peyton Feltus, president of Randolph Risk Management, an energy consulting firm in Dallas, said this month, adding that “2007 was a very different energy world. There was so much demand for finished products.”
Crude production jumped to 7.16 million barrels a day as of March 8, the highest level since July 1992, driven by increased drilling in oilfields, including North Dakota’s Bakken shale and the Eagle Ford in Texas, according to the Energy Information Administration.
Gasoline at the pump, averaged nationwide, has risen to about $3.70 a gallon, 15 percent higher than its December low, according to Heathrow, Fla.-based AAA, the largest U.S. motoring group. It has averaged about $2.70 since 2003. Texas light sweet crude oil, was selling last week at about $92.96 a barrel on the New York Mercantile Exchange, up $1.14 this year. Brent crude, the global waterborne oil that more closely reflects prices paid by U.S. refineries, has dropped 2.2 percent.
The credits that refiners must collect to show compliance with the federal mandate are attached to each gallon of ethanol as it’s distilled or imported into the United States. Ethanol is a form of alcohol created by fermenting and distilling starches from corn, sugar, wheat and other crops. Most of the fuel in the U.S. is corn-based.
When the biofuel is combined with gasoline, the credits go to the blenders, which can use them if they also produce gasoline or sell them to other obligated parties if they don’t need them or have an excess.
Each credit has the Renewable Identification Number, tracked by the EPA. The RINs, which are traded among brokers, jumped to a record $1.06 a gallon on March 8 from 7.1 cents on Jan. 7, according to data compiled by Bloomberg.
Complying with the mandate has become harder as the government boosted the total amount of ethanol that must be blended with gasoline by 53 percent from 2008, while motor fuel demand has dropped 15 percent from a 2007 record, according to refiners including Valero Energy and Marathon Petroleum. The gap means higher pump prices, refiners say.
“A dollar a RIN is 10 cents a gallon,” Bill Klesse, chief executive officer of Valero, the world’s largest independent refiner, said Monday at the American Fuel and Petrochemical Manufacturers Conference in San Antonio. “It’s going to get passed on.”
Valero estimates its cost to comply with the Renewable Fuels Standard will be $500 million to $750 million this year.
Gasoline demand is projected to average 133.5 billion gallons in 2013 and 2014, the EIA, the statistical arm of the Energy Department, said in its March 12 “Short-Term Energy Outlook.” Under the 2007 energy law signed by Bush, the U.S. is required to use 13.8 billion gallons of ethanol this year and 14.4 billion in 2014. Ethanol is typically combined with gasoline in a 10 percent ratio, which is referred to as the blend wall.
Some auto manufacturers won’t offer a warranty if drivers use fuel with more than 10 percent ethanol because of its corrosive properties, effectively capping how much refiners can blend at about 13.4 billion gallons for 2013, Charles Drevna, president of the industry group, said at the conference. That’s 400 million gallons less than the government mandate, raising demand for RINs to make up the difference.
Green Plains Renewable Energy Chief Executive Officer Todd Becker described the RINs surge as a classic short squeeze, a situation in which a lack of supply forces up prices, and said refiners have more room to consume ethanol without exceeding the blend wall. Becker said higher RINs costs aren’t having a measureable impact on gasoline and pointed toward record returns from refining the motor fuel from crude oil.
“There’s no way that RINs would add 10 cents to every gallon of gasoline,” Geoff Cooper, vice president of research and analysis at the Renewable Fuels Association, a Washington- based trade group, in a telephone interview Tuesday. Cooper said an additional 10 cents assumes that a RIN costs $1 and that all gasoline a refiner is selling contains no ethanol.
There are about 2.6 billion RINs carried over that can be used to comply with the law in 2013, the EPA said in a Federal Register posting on Feb. 7. As the program requires more blending next year, it’s “more likely” that the volume of ethanol to be blended will exceed the amount that can be mixed with gasoline, the agency said.