Dallas News: Ethanol credits create a volatile market

September 30, 2013

James Osborne, September 27 – Massive fluctuations in the market for ethanol credits are raising scrutiny of the federal government’s efforts to integrate the corn-based fuel into the nation’s gasoline stream.

Between January and July, a credit attached to a gallon of ethanol jumped from 7 cents to more than $1.40. That meant that for every gallon of gasoline a refinery turned out, it would have to spend about 14 cents for the requisite ethanol credit — about 10 percent of a standard gallon of gasoline is now ethanol.

When energy companies mix ethanol into gas, or import fuel blended with ethanol, they get a credit from the government. That credit can be sold to other companies that don’t blend ethanol to help them meet federal requirements, creating a marketplace.

Valero Energy Corp., the country’s largest independent refiner, has estimated the price spike could cost it up to $800 million. Dallas-based HollyFrontier, in a May conference call with stock analysts, put its potential exposure at $200 million.

The price of the credits has fallen since then. Credits were trading for around 50 cents this week. But industry leaders like Valero CEO William R. Klesse are calling for an overhaul of the country’s renewable fuel standards, created under President George W. Bush in 2005 with the intent of reducing pollution and the nation’s reliance on foreign oil.