Leading up to the release of the final renewable volume obligations in the Renewable Fuel Standard this week, an analysis from Wells Fargo shows most independent refiners realize a net benefit from renewable identification numbers, or RIN.
The U.S. Environmental Protection Agency has until Thursday to release the 2018 final RFS volumes. The agency has faced a deluge of proposed changes to the RFS including moving the point of obligation.
Reports surfaced in February that President Donald Trump, along with his adviser at the time, billionaire energy investor Carl Icahn, had prepared an executive order to change the point of obligation from refiners and importers of gasoline and diesel to ethanol blenders.
Ethanol industry representatives and some oil interests opposed to the switch have feared it would discourage expanded ethanol blending. Groups that support the switch claim that obligating blenders would spread compliance costs through the RIN market. That market is designed to allow obligated parties to show compliance with the law by buying either physical gallons or the credits attached to actual gallons produced.
A Wells Fargo analysis last week reached a number of conclusions about the RIN market.
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That is, most independent refiners see a net benefit from RIN; movements in RIN prices seem to have little or no effect on investor attitudes toward biofuels; when RIN prices change rapidly it is reflected in the price of wholesale gasoline; RIN costs are passed along to wholesale gasoline consumers; among others.
Geoff Cooper, executive vice president of the Renewable Fuels Association, said Wells Fargo has been a critic of the RFS. Wells Fargo previously has maintained RINs were an impediment to profit margins in the refining sector.
"However, this new Wells Fargo report concluded that refiners are actually benefiting from RINs, as evidenced by higher share prices and strong earnings during periods of relatively high RIN prices," Cooper said.
"Wells Fargo's analysis corroborates other studies that find refiners are recovering their RIN costs through the 'crack spread' (i.e., the difference between the refiner's cost of crude oil and the refiner's selling price for the refined petroleum products from the crude oil). In other words, the refiner's RIN costs are passed on to the wholesale level, where they are equally offset when ethanol is blended with gasoline and value of RIN is captured by the blender. In fact, the Wells Fargo report shows that as RIN prices have increased recently, refiner share prices have also increased."
RIN costs, Cooper said, are passed on to the buyer of gasoline blendstock and not the retail consumer.
"The RIN cost is effectively erased when the gasoline blendstock is combined with ethanol (which comes with a RIN credit) to make the finished fuel (E10) that is sold at retail," he said.
In its analysis, Wells Fargo said independent refiners should focus on providing consumers with biofuels and fossil fuels on equal footing.
"In what may be a surprise to some, most independent refiners now enjoy a net benefit from renewable identification numbers (RIN), based on our analysis. This reflects a distinct change from 2013 when RINs negatively impacted refiner's profitability.
"Our conclusion is independent refiners should focus less on the specific impacts of RINs (though the program could use some tweaks, in our view) and more on establishing a level competitive playing field for biofuels and fossil fuels on taxes and emissions. Investors should not spend much time and effort on the risks to refining margins historically posed by RINs."
Todd Neeley can be reached at email@example.com
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