The American Interest: Oh, the RINsanity!

September 17, 2013

Walter Russell, September 16 – On January 8, RINs, ethanol credits available to fuel refiners looking to meet government-mandated biofuel production targets, were trading at 7 cents a credit. The price of credits spiked sharply this year, hitting $1.33 in late July before settling back down to roughly 60 cents a credit today.

Here’s why: while biofuels targets have risen every year since they were initially put in place in 2007 as part of the country’s Renewable Fuel Standard (RFS), demand for gasoline has stagnated as a result of economic stagnation and more fuel-efficient cars. To meet the mandates, refiners have had to blend more and more ethanol in to every gallon of gasoline, but are butting up against what the industry calls the blend wall: gasoline that is more than 10 percent ethanol by volume can damage car engines. Concern over the blend wall has refiners snatching up RINs, causing the price spike, but as the New York Times reports, it’s not only the refiners that are buying up the credits. Wall Street has taken an interest:

“A few worried that Wall Street would set out to exploit this young market, fears the government dismissed. But many people believe that is what happened this year when the price of the ethanol credits skyrocketed 20-fold in just six months, according to an analysis of regulatory documents and interviews with more than 40 people involved in the market, including industry executives, brokers, traders and analysts.

Traders for big banks and other financial institutions, these people say, amassed millions of the credits just as refiners were looking to buy more of them to meet an expanding federal requirement. Industry executives familiar with JPMorgan Chase’s activities, for example, told The Times that the bank offered to sell them hundreds of millions of the credits earlier this summer. When asked how the bank had amassed such a stake, the executives said they were told by the bank that it had stockpiled the credits.”

The NYT report is on the dry side, but paints a detailed picture of the RIN roller coaster gasoline refiners have had to ride this year. The situation is all the more farcical when you account for the fact that corn-based ethanol, the source of the vast majority of America’s biofuel, isn’t even green.