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US lawmakers scrutinize role of ethanol credits in gasoline price spike

03.14.2013  | 

The price of credits used by refiners to meet federal ethanol blending requirements has risen more than 1,000% in recent weeks. The heightened volatility in this normally sleepy market has raised concerns that it is a factor in the recent rise in the price of gasoline.

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By DAN STRUMPF 

NEW YORK--Two Congressional committees are looking into whether a price spike in an obscure corner of the biofuels market is behind the recent run-up in the cost of gasoline.

The price of credits used by refiners to meet federal ethanol blending requirements has risen more than 1,000% in recent weeks. The heightened volatility in this normally sleepy market has raised concerns that it is a factor in the recent rise in the price of gasoline.

Retail gasoline prices averaged $3.706 per gallon nationally Wednesday, according to auto club AAA, an increase of more than 41 cents, or 12.6%, since the start of the year. US crude oil futures have risen less than 1% during the same period.

Earlier this week, Sen. Ron Wyden (D. Ore.), chairman of the Senate Energy and Natural Resources Committee, sent a letter to the Energy Information Administration (EIA) requesting information about gasoline prices, including data on oil production, exports and transportation infrastructure. The committee plans to hold a hearing on gasoline this spring.

The committee is also looking into the recent increase in the price of ethanol credits, spokesman Keith Chu said.

"It's an issue that's surfaced as we're looking into the gas price run-up," Mr. Chu said.

Separately, the Republican-controlled House Energy and Commerce Committee has taken notice of the recent surge in ethanol credit prices, a spokeswoman said. The committee plans to hold hearings later this year on the renewable fuel mandates and intends to review whether the mandates are affecting gasoline prices, she said.

Neither committee has launched a formal investigation.

The Environmental Protection Agency (EPA) mandates that a certain amount of ethanol be blended into the US gasoline supply each year. Refiners who don't meet the requirement can buy credits called Renewable Identification Numbers, or RINs, as a substitute.

Last year, the U.S. consumed about 133 billion gallons of gasoline, the lowest level in 12 years. As most retail gasoline sold contains 10% ethanol, roughly 13.3 billion gallons of ethanol was blended into gasoline, just above last year's approximately 13.2 billion-gallon requirement.

But the EPA mandate is set to rise this year, even as demand for motor fuel declines. The latest proposal, if approved, could force refiners and fuel importers to use more than 14 billion gallons of ethanol.

Refiners are concerned that they won't be able to sell enough ethanol to keep up with the mandates. Automakers say most vehicles can't handle more than 10% ethanol, and the market for higher blends, such as 85%, is relatively small.

That has caused the price of ethanol credits to rise sharply, as refiners worry they won't be able to meet the mandate. RINs representing a gallon of ethanol traded for under 10 cents at the start of the year. Prices climbed rapidly in recent weeks, soaring to more than $1 on Monday. On Tuesday, the price dropped to under 80 cents a gallon.

"There's a worry of there not being enough RINs to meet the mandate," this year or in 2014, said Mike Garcia, an ethanol broker at Atlas Commodities LLC in Houston. "That's caused a flurry of these refineries to go out and buy them."

Not everyone thinks that the run up in the price of credits is spilling over into gasoline prices. Gene Gebolys, CEO of World Energy, a Boston-based trader of biodiesel, said the relationship between the two markets has been "overblown."

"Yes, the RIN values are going up and yes, that's a contributing factor to the overall price of gasoline...but it's a bit simplistic to say that if the RINs go up, they immediately translate to a one-for-one increase in gasoline prices," he said.

But some refiners and traders warn that the volatility could be spilling over into the price of gasoline. If the credits get too expensive, refiners may opt to curb imports or export more gasoline, they said.

"The most likely scenario is that costs would be passed onto consumers," said Bill Day, spokesman for refiner Valero Energy Corp.


Dow Jones Newswires



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Dr. Jerry Schalski
03.15.2013

Looks like just another excuse to gouge the little guy for greedy funds.

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