Details are skimpy at this point, but a lot more refiners are going to need to account for ethanol somehow in their operations
The most recent shift in the Trump administration's policy on biofuels, particularly ethanol, is likely to have an impact in the transportation sector both on the rails and on the roads.
Tracking the ups and downs of U.S. regulation on biofuels can be head-spinning. But what reports this week said is about to happen is that the administration is going to roll back the number of refiners that have been given waivers from U.S. biofuel rules. The biofuel mandates, under the umbrella of the Renewable Fuel Standard, are aimed at spurring ethanol and biodiesel consumption, presumably helping the U.S. farmer in the process.
The decision to change course comes after a federal court decision last month in Denver that said the EPA had exceeded its authority in granting waivers to three specific refineries for their 2018 consumption levels. There were other exemptions as well, but that trio of plants was at the heart of the case.
However, according to a Bloomberg report first suggesting the Trump administration was going to change course and reduce the number of exemptions, a lot more than those three exemptions could be on the chopping block.. The report described the number of refineries to be affected as in the "dozens."
The prospect of a lot of refineries newly coming under federal ethanol mandates leads to two possibilities that could impact transportation.
The first is that more ethanol will need to be consumed — theoretically. If that proves to be the case, more ethanol would be moved by rail from the plants that produce it to the wholesale distribution points in the supply chain; those end points are known as the rack.
Ethanol cannot be blended into the unfinished gasoline known as RBOB — think of RBOB as gasoline without the ethanol — until it is close to the final retail sales point. That's generally the rack.
The blending must take place at the rack rather than a refinery because the products coming out of the refinery are generally transported by pipeline. Ethanol in a pipeline is problematic; it picks up water molecules that might be in the pipeline, which can then damage the quality of the fuel. Not blending it until it's about to leave the wholesale distribution point on its way to a retail outlet, carried in a tanker truck, avoids that problem.
Ethanol consumption in the U.S. even with the waivers that have been in place is near an all-time high. In the most recent report from the Energy Information Administration, ethanol blending into gasoline was 902,000 barrels per day. The average last year was 920,000 barrels per day. A year before it was 912,000. The single biggest week ever for ethanol consumption occurred in August last year, when it hit 967,000 barrels per day.
Chet Thompson, president of the American Fuel & Petrochemical Manufacturers, ripped the decision and said "the ethanol industry has not lost a gallon of demand due to [small refinery exemptions.] More of their product is being blended now than ever."
That isn't precisely true, as the data shows, but it's close. Whether the end to the exemptions results in more ethanol being consumed — and more trucks needed to haul corn to ethanol plants, as well as more rail cars needed to take ethanol from the plants to the wholesale distribution point — depends to a large degree on the types of refineries that will lose their exemption.
The big refining names — Valero, ExxonMobil, Shell, etc. — all have wholesale distribution networks. By having that network, they have a place where they can meet the requirements of the Renewable Fuel Standard (RFS) by blending ethanol into RBOB to make finished gasoline.
But a refiner with no such network has a problem. It still has the mandate under the RFS but it doesn't have any way to get ethanol into its fuel. Refineries like that inject their ethanol-free fuel into a pipeline to get to market. But they have no place where they can blend ethanol. They will need to sell the unfinished fuel to somebody who does.
The solution: a RIN. A RIN is a renewable identification number. Think of it as a get-out-of-jail free card. A refiner unable to meet its RFS obligations for whatever reason, including lack of a wholesale distribution network, can buy RINs on the open market to meet its obligations.
RIN prices are volatile. With the news of the possible rollback of the number of refiners broke this week, S&P Global Platts reported that a RIN that would satisfy a 2020 obligation had moved up 11 cents to 43 cents, a gain of almost one-third. Platts also reported that reading the decision handed down by the court, the federal government had granted 64 improper exemptions.
Just last October, Matt Lucey, president of refiner PBF, which has long criticized the RFS and the amount of money it needs to spend on RINs, said he believed the Trump administration "is committed to not letting RINs move." But that is already happening.
Where a RIN impacts transportation is that if a refiner chooses to meet its obligations through the purchase of a RIN, no ethanol is being transported in response. However, a RIN is generated by the consumption of ethanol somewhere else in the chain. So there is transportation behind that RIN somewhere in its genealogy.
But if some of the refiners that are losing their exemption are in position to blend ethanol rather than buy RINS, that's the choice that could create more demand for rails to move the ethanol and trucks to take the corn to the ethanol plants.