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DAVID KRUSE

CommStock report

September 8, 2017
Farm News

Renewable Identification Number - RIN-credits for biodiesel reportedly hit $1.17/gallon after the tariff announcement that will stop biodiesel imports from Argentina and Indonesia. The protectionism blocking imports will tighten the supply of biodiesel available domestically. Petroleum refiners can purchase RINs in order to meet their RFS obligation to blend biofuel. The idea was that the cost of the RIN is far higher than the cost of blending ethanol or biodiesel so that oil companies would opt to blend more biofuel. Some Refiners however have fought the obligation hoping that they could get the government to remove the blending requirement for refiners.

Carl Icahn owns a refinery, CVR Energy, and vigorously attempted to use his influence as the designated Trump administration's deregulation advisor to rid his company of the RIN obligation. CNBC says that through the third quarter CVR Energy had built up a $280 mln liability to purchase RINs to satisfy its RFS obligation. Icahn's company didn't buy them thinking that he could see to it through his insider influence that the "point of obligation" would be changed, eliminating the liability for refineries to the RFS.

Instead his effort to eliminate the RIN obligation failed and RINs have inflated nearly 200% in value since February so his decision to delay purchasing them has proved to be a costly mistake for Icahn. He bet against the market and is losing. Reuters wrote, "Not buying RINs is like running up a bar tab - that is, if the cost of beer fluctuated wildly and your final bill was calculated based on the price of suds on the day you settle up. The EPA allows refiners to run a deficit for a while, but they must eventually meet their full obligation. CVR Energy was essentially betting it could buy up cheap RINs before a deadline to meet its obligation in the first quarter of 2018."

Carl's lobbying for his personal self-interest attracted regulatory interest and he resigned his advisory role to try to escape the negative attention it had generated. Carl had supported Scott Pruitt as EPA administrator and thought that given his in with the President that he could nix his RIN obligation from the inside. At one time, the White House represented Icahn's position calling the change in RIN obligation "a done deal". It got undone when the industry pushed back.

CVR Energy is not the only refinery pushing to end its RIN obligation. CHS has complained loudly about their obligation to buy RINs siding with Icahn. They operate as a petroleum company and under their previous CEO they balked at blending biofuels sporting their Ruby-Red diesel petroleum. One would have thought that CHS would have had no trouble with blending biofuel but has resisted it with both ethanol and biodiesel dragging its heels rather than leading the way on blending biofuel. I hope the new CEO takes a different approach and blends biodiesel, there-in eliminating the RIN obligation for CHS that way.

Reuters offered a Special Report entitled: 'Refiner Valero's Secret Campaign Against US Biofuels Mandate.' Valero is America's largest oil refiner. It also owns ethanol plants including one here locally that I have sold corn to. Reuters says that "after selling off much of its ethanol blending operation in 2006 and 2013, Valero was forced to spend $750 million last year alone buying the credits. They are expected to incur an obligation of $850 mln this year but that will be determined by the market."

So Valero is in the same league with CVR and CHS to get the RIN obligation dropped for refineries. Reuters says that Valero backed Icahn encouraging his efforts inside the administration to drop the "point of obligation" for blending from refiners. Other refiners, Tesoro and Marathon invested in blending facilities to reduce their RIN obligation so this was a business decision whether to comply with blending or instead lobby to kill it. Valero reportedly put a lot of resources into killing it. It is rather ironic that Valero is buying corn from farmers to make ethanol for which they are trying to undermine the obligation that it be blended with strong lobbying efforts in Washington.

Ethanol plants are motor fuel refineries that make that fuel from corn. There is no shortage of feedstock. Slightly over 10 percent of the nation's motor fuel supply is produced by ethanol plants. They are primarily located in the corn-belt and therefore are not impacted by hurricanes. I have argued that this makes them an important component of US energy security and that certainly is the case today. I have seen estimates of somewhere between 10-25 percent of US petroleum refinery capacity being shut down by the storm for as long as several weeks.

Pump prices have gone up and will go up some more. I filled up recently with E-30. It was 35 cents/gallon cheaper than E-10 at the Star Energy pump. That means that I saved $8.19 for the 23.4 gallons I bought. I realize that the industry is pushing E-15 but E-30 was 28 cents gallon cheaper than E-15. E-30 is the best fuel. . .more octane. . . same mileage as E-10. . . and no evidence of any damage to non-flex fuel engines. If it were not for the refinery capacity provided by the ethanol industry, given a storm like Harvey, gasoline pump prices would have spiked further than they will. The ethanol industry will help keep the lid on motor fuel prices so that all consumers, even the dumb ones who do not use ethanol, will benefit.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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