Oil Refiners Blame Biofuel Credits For Recent Surge In Gas Prices

Michael Teague  |

The recent spike in the price of crude oil over the past two weeks to where it currently sits at just over $106 has been accompanied by a rise in prices at the pump. Although domestic oil production is actually up, the average price for a gallon of gasoline in the US climbed $0.15 over the past week, to today’s $3.63 per gallon according to Automobile Association of America.

While the price tag for crude has been variously passed off on turmoil in the Middle East, refinery issues, or the increased popularity and availability of natural gas, this second price-hike at the pump of 2013 is a more complex story, and is certain to be a subject of discussion at a Senate hearing on Tuesday.

The House Energy and Commerce Committee will hear testimony from Valero Energy Corporation (VLO) CEO Bill Klesse, as well as from the Energy Information Administration’s Adam Sieminski as part of an investigation into this year’s increases in the cost of fuel.

Klesse will argue that the government’s renewable fuel mandate that was set in place as a result of 2007’s Energy Independence and Security Act is playing into the rising gasoline costs. The Renewable Fuel Standard (RFS) mandated that fuel sold for transportation purposes contain a minimum of renewable fuels, such as ethanol.

That minimum currently ensures that all gasoline contain at least 10 percent ethanol (E10), a minimum that is, theoretically at least, supposed to increase over time with a view to reducing carbon emissions from vehicles. The problem is that the infrastructure for gas and fuel containing higher concentrations of ethanol has not entirely caught up with the RFS timeline.

Refiners can offset the requirement by paying for Renewable Identification Numbers, otherwise known as RINs. But the price of RINs has lately surged to all-time highs. Corn-based ethanol RINs were up $0.12 cents on Monday to a record $1.32, compared to March of this year when the price of a RIN barely exceeded $1.

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The American Petroleum Institute has expressed concerns about a shortage of credits as minimum ethanol levels for biofuel increase, putting pressure on refiners to purchase more of them. Valero’s Klesse has been more direct still, blaming “higher prices and increased uncertainty in the gasoline market” directly on RINs, and will use Tuesday’s meeting to call for a substantial overhaul of the RFS. The EIA also seems to concur at least to some extent, though it is more concerned about helping refiners comply with the RFS standards, rather than changing those standards altogether.

For its part, the ethanol industry has claimed that there is no connection between RINs and rising gas prices. Representatives from the Washington-based ethanol advocacy group the Renewable Fuels Association has accused refiners of trying to create a false-crisis as part of an effort to unravel RFS standards rather than pay the cost of upgrading equipment and comply with higher ethanol minimums, and Growth Energy, a renewable fuels trade group, has said that refiners can simply sell fuels with higher concentrations of ethanol if they do not want to pay for RINs.

But the underlying problem for both refiners and ethanol producers could have more to do with the drastic decline in petroleum use since RFS standards became mandated in 2007. According to Bloomberg, daily average gasoline use between 2007 and 2012 dropped by 8.3 percent. The provisions of the Renewable Fuel Standards only compound this problem, as they require ever-increasing amounts of ethanol to be used in fuel, to hit a target of 36 billion gallons by 2022, irrespective of actual demand.

[Image: ethanol fuel pump, courtesy of Flickr Creative Commons]

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