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No one happy with RINsanity solution

Eight months after the legal deadline the Obama administration has released the 2013 Renewable Fuels Standard rule. More importantly it promised waivers next year that will supposedly keep this badly designed law from inflating gasoline prices.

Hardly anyone will be truly happy with this decision. The agricultural lobby will be dismayed by the tacit abandonment of the effort to dump ever more corn into the nation’s fuel mix.

Merchant oil refiners who do not blend their own fuel are still on the hook to buy up as many ethanol-blending credits, known as RINs, as they were before.

The firms that profit from this setup — the traders and hedge funds that have been speculating on RINs as well as companies like oil major BP that blend more gasoline than they import and manufacture — will still be winners from this flawed system.

So what have the regulators done? They’ve thrown a bone to the losers in this trade in the form of an extended compliance deadline and a reduction of the unworkable advanced biofuels requirement that will ease the pressure on buyers for 2013.

But say you are a trader at one of the firms short RINs. How would you trade for 2014? Would you slow purchases in the hope that the Environmental Protection Agency’s 2014 RINs rules are flexible enough to keep your requirements under control? Or do you instead keep buying to try and hoard 2013 RINs?

In essence, all the EPA has done is admit that the Renewable Fuel Standard is irretrievably broken without offering a fix. And to be fair, it is outside of the EPA’s duties to fix the Renewable Fuels Standard (RFS) which is, after all, an act of Congress.

But the United States is now going through the spectacle of trying to enforce the functioning of a renewable fuels policy that it acknowledges is broken.

The problem

The RFS assumes a gasoline market that is much bigger than it is in reality and one that is growing robustly rather than contracting. Nor are advanced biofuels anywhere near commercial availability.

Fixing these issues means substantial changes to the RFS and the Obama administration seems to have signalled that it is willing to abandon the push to greater than 10 per cent ethanol blending in conventional gasoline.

The biofuels industry is also unlikely to be very happy with this ruling. While backers had been ready to throw advanced biofuels requirements under the bus to preserve market share for conventional biofuels, such as corn-derived ethanol, they were adamant that the fuels industry should simply be forced to shift to higher ethanol content fuel blends one way or another.

Now they face an abandonment of the policy of ever-higher blends of corn ethanol into the fuel mix in the name of keeping fuel cheap, ironically one of the original arguments for higher biofuels mandates.

There is a simple way out of this mess. A simple requirement reserving a certain percentage of the fuel mixture for ethanol would streamline enforcement and compliance and allow for sensible, long-term planning by all sides in the industry.

Unfortunately achieving this sort of solution will require political leadership both from the Obama administration as well as the factions in the U.S. Congress that back various aspects of the current regulatory regime.

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