Gas prices surge as refiners see a run on biofuel credits
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 car 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.
“Demand is coming from so many different areas,” said Dirico, whose firm is a partner in OTC Direct, a
trading platform for environmental credits including RINs.
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.
D6 RINs, which track ethanol blending in gasoline, have climbed from 17 cents a year ago to $1.415 this week, the highest since 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,” Height Capital Markets analysts Benjamin Salisbury and Josh Price said a note for clients.
Part of the run-up in RINs may be driven by refiners that anticipated relief under the former Trump administration and are now seeking to buy credits to fulfill 2020 biofuel-blending quotas, the Height analysts said.
Gas guzzlers
Gasoline demand in the U.S. has been steadily rising
since the Texas deep freeze kept drivers home by the millions in mid-February. Several factors have edged gasoline prices higher, including refinery closures amid the cold spell, higher costs for crude and climbing demand.
Prices at the gas pump have risen for 45 straight days, the longest run since 2004. The average cost to consumers for a gallon of gas is $2.88 nationwide, according to AAA. In California, which typically exceeds national trends, the average price is nearing $4 at $3.87 a gallon.
The rise in the value of renewable fuels this year is likely to help bring on nationwide $3-a-gallon gasoline faster than many expected. The U.S. average consistently last topped $3 in 2014, data from auto club AAA show. Patrick DeHaan, head of petroleum analysis at retail tracker Gas Buddy, said this week that the average has a 70 percent chance of reaching $3 by Memorial Day — traditionally the start of peak summer travel.
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.
Higher costs
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.
Now, Biden’s EPA is considering taking the unusual step of addressing two years at once when it proposes blending quotas this spring.
The EPA aims to issue final requirements for both 2021 and 2022 by the legal deadline of Nov. 30, officials with knowledge of the situation said.