The Motley Fool: Are Regulations Causing Higher Gas Prices?

August 5, 2013

Tyler Crowe, August 4 – Eight hundred million dollars.

That's how much money Valero (NYSE: VLO  ) estimates it will cost to comply with the United States' Renewable Fuel Standard through the purchase of Renewable Identification Numbers, or RINs. It's a pretty hefty bill no matter how you spin it, and those charges can only lead to one thing: higher gas prices.

Let's look at this renewable fuel credit phenomenon and see why it's having such an effect on refiners' bottom lines and your gasoline bill.

From RINsanity to higher gas prices

When RINs were created in 2005, they were intended to reduce our reliance on foreign oil with a domestic energy source. In a way, they did their job rather brilliantly. The RIN credit enabled ethanol producers to earn an extra premium on their product that helped to cover the costs of development. Within six years, the production of ethanol shot up 257% and was helping to displace just over 9% of our fuel needs. As the production of ethanol increased, the price of RINs remained steady.

The massive run-up back in March was frightening, and it hasn't gotten much better since. Spot prices for D6 RINs — corn ethanol — hit an all-time high of $1.48 last week. For refiners to meet the requirements for the Renewable Fuel Standard, they have to buy these RIN credits, sometimes from the secondary markets completely independent of the purchase of the ethanol itself. This is one of the reasons Valero has given that $800 million figure for losses attributable to RINs, and Marathon Petroleum (NYSE: MPC  ) has already given warning that RINs will have a significant impact on its earnings release in August.