Saturday, January 20, 2018
Business

Ethanol helps inflate gasoline price

CHICAGO — Even as the U.S. produces more oil than at any time since 1992, gasoline remains a dollar higher than the average for the past decade in part because of George W. Bush-era rules that attach a 38-digit Renewable Identification Number to every gallon of ethanol.

Gasoline prices at service stations have risen an average 12 percent this year as benchmark West Texas Intermediate crude has risen just 1.2 percent. Part of the reason is the 10-fold increase in the cost of credits that refiners must buy to comply with the 2007 law designed to boost ethanol consumption.

Bush's mandate predated a boom in oil and gas production that helped the United States meet 84 percent of its energy needs in the first 11 months of last year, government data show, the most since 1991. Since its passage in 2007, annual gasoline demand has dropped 6.3 percent while U.S. output has soared 28 percent, making compliance more expensive for refiners and eclipsing any benefit from replacing hydrocarbon-based fuel.

"It's bastardized our markets off into some cosmic market that has nothing to do with supply and demand," said Peyton Feltus, president of Randolph Risk Management, an energy consulting firm in Dallas. "2007 was a very different energy world. There was so much demand for finished products."

Crude production jumped to 7.16 million barrels a day as of March 8, the highest level since July 1992, driven by increased drilling in oil fields including North Dakota's Bakken shale and the Eagle Ford in Texas, according to the Energy Information Administration.

Gasoline at the pump, averaged nationwide, has risen to $3.697 a gallon, 15 percent higher than its December low, according to AAA. It has averaged $2.697 since 2003.

The credits that refiners must collect to show compliance with the federal mandate are attached to each gallon of ethanol as it's distilled or imported into the United States. Ethanol is a form of alcohol created by fermenting and distilling starches from corn, sugar, wheat and other crops.

When the biofuel is combined with gasoline, the credits go to the blenders, which can use them if they also produce gasoline or sell them if they have an excess.

Each credit has the Renewable Identification Number, tracked by the EPA. The RINs, which are traded among brokers, jumped to a record $1.06 a gallon on March 8 from 7.1 cents on Jan. 7, according to data compiled by Bloomberg.

Complying with the mandate has become harder as the government boosted the total amount of ethanol that must be blended with gasoline by 53 percent from 2008, while motor fuel demand has dropped 15 percent from a 2007 record, according to refiners including Valero Energy and Marathon Petroleum. The gap means higher pump prices, refiners say.

Valero estimates its cost to comply with the Renewable Fuels Standard will be $500 million to $750 million this year.

There are about 2.6 billion RINs carried over that can be used to comply with the law in 2013, the EPA said in a Federal Register posting on Feb. 7. As the program requires more blending next year, it's "more likely" that the volume of ethanol to be blended will exceed the amount that can be mixed with gasoline, the agency said, and the number of carryover RINs into 2014 will "almost certainly" be lower than for 2013.

The agency is accepting public comments on the fuel standards until April 7, and then will review the comments before deciding on any potential revisions to blending requirements next year, according to an email.

"In 2014, we're going to start hitting a wall and getting to a point where the regulators are calling for something that can't physically be done," said John Auers, senior vice president of Turner Mason. "This isn't a short-term trend. The high prices aren't going away."

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