Magical Mystery Tour - Turmoil in U.S. Gasoline Markets and the Arcane World of RINs

The rising cost of Renewable Identification Numbers (RINs) –– ethanol credits used by refineries to prove compliance with the federal Renewable Fuel Standard –– is putting added financial pressure on the refining sector, which already is squeezed by too-high inventories and thin crack spreads. In fact, for some refiners RIN expenditures may soon be their biggest single operating cost category. (Yes, you read that right.) The cost of ethanol credits is being driven up to record levels by several factors, chief among them the concern there may not be enough to go around this year and next. And things may only get worse from there. In today’s blog, we begin a two-part examination of the 2016-17 market for RINs, a regulatory must-do that rankles and vexes most refiners and gasoline importers.

The refining sector is not for the faint of heart or the foggy of mind –– the complexity of it all would challenge Job’s patience and Einstein’s cerebrum. Consider the hundreds of crude grades and incredible numbers of characteristics, including a continuum of qualities: from light to heavy, sweet to sour, and paraffinic to naphthenic, ad infinitum. We’re not talking checkers or even chess here; we’re talking three-dimensional chess. And each refinery is designed to process only a specific range of crude types. There’s the need to ratchet up toward summer-blend gasoline each spring and then gradually switching back to producing non-summer-blend at the end of driving season.  And then there’s the need to schedule weeks-long “turnarounds” to do maintenance and other work, and deal with (heaven forbid) unscheduled maintenance/downtime. Not to mention the logistics of crude delivery and storage, refined-products production and delivery etc.

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None of that, though, may be as hard to wrap your head around as Renewable Identification Numbers (RINs), a mechanism created by the Environmental Protection Agency (EPA) to help ensure that the provisions of the Renewable Fuel Standard (RFS) are being complied with. We took our first look at the RFS and RINs four years ago this week in A Market of Contradictions –– Ethanol Mandates, Motor Gasoline and the Blend Wall.   A few weeks later we came back with more still more mind-numbing details in The RIN and Stimpy Show – Crushing Pain and Mandate Madness.  In those blogs  we explained the need to establish a mechanism to track the production of corn- or sugar-based ethanol (and biodiesel and other renewable fuels) and the blending of ethanol with gasoline; we also described how the whole RIN deal works.

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