WASHINGTON -- When it comes to the fight against escalating RIN prices, refiners are finding an unexpected ally.
The Renewable Fuel Standard (RFS) requires refiners as obligated parties to blend a set quantity of renewable fuel such as ethanol or biodiesel into transportation fuel each year. Refiners can blend actual fuel or, if they are going to come up short on their targets, buy Renewable Identification Numbers (RINs), which act as a credit toward their obligation, from other blenders such as large fuel retailers.
Whenever the Environmental Protection Agency (EPA) raises blending quotas, as it did for 2016, RIN prices tend to rise. Refiners argue that the quotas surpass the amount of biofuels they can legally blend into transportation fuel—or 10%—and that demand growth has not been strong enough to keep pace with the increasing quotas. That makes RINs more valuable as a way to meet their obligations.
In 2016, refiners are set to hit a record in RIN spending, according to a recent Reuters analysis. That’s because RIN prices are jumping—up 25% in second-quarter 2016 vs. the same time a year ago, based on an analysis of figures from the Oil Price Information Service (OPIS).
This spending on RINs has put incredible pressure on refiners’ profits, which already are suffering as fuel stockpiles swell. Reuters estimates that 10 of the major U.S. refiners spent a minimum of $1.1 billion during the first half of 2016 on buying RINs. If this pace keeps up, they are set to break a previous record of $1.3 billion in 2013.
Each time RIN prices escalate, refiners and their representatives ask—and sometimes sue—the EPA to shift the point of obligation downstream to fuel distributors who blend at the rack. In early August, the American Fuel and Petrochemical Manufacturers trade group petitioned the EPA to redefine an obligated party as “the entity that holds title to the gasoline or diesel fuel, immediately prior to the sale from the bulk transfer/terminal system … to a wholesaler, retailer or ultimate consumer.”
Now some fuel retailers are jumping into the debate—on the side of refiners. The Small Retailers Coalition is a Washington, D.C.-based organization that formed this past July, right at a time when RIN values were soaring toward the 2013 high. The group’s founder is a familiar, respected industry veteran: Bill Douglass, chairman and founder of Douglass Distributing, Sherman, Texas, which has more than 20 Lone Star convenience stores and supplies more than 170 sites.
Late this past July, the group sent a letter to Janet McCabe, acting assistant director for the EPA’s Office of Air and Radiation. In the letter, Douglass asks the EPA to shift the point of obligation down to the rack.
“The big driver is frankly survival,” Douglass told CSP Daily News. From his perspective, many large chains have an unfair fuel profit advantage thanks to their ability to raise massive revenue from selling RINs. For example, Murphy USA, which Douglass competes with in Texas, generated $117.5 million in 2015 from RINs.
In the current market, Douglass said his competitors are selling at a loss of 1 or more cents per gallon (CPG), but are still able to be profitable thanks to RINs. Douglass’ sites may try to meet their street price, but it can become financially crushing.
“The cost isn’t an issue if you’re getting a 10-cent ethanol RIN and 15-cent biofuel RIN,” said Douglass. “That’s all the margin you need. So they can just sit there and beat you to death.”
While Douglass might describe his company as a “small marketer,” size is relative. The company often buys more than 100 million gallons annually, making its volume modest but not insignificant. But because it is branded, it does not earn RINs for blending at the rack—instead, its supplier does. As far as Douglass can tell, its supplier is not passing down any savings from the RINs. Meanwhile, his large competition is able sell aggressively and still profit.
“If you’ve got a margin that equals my annual fuel margin to play with, then I’m at a distinct disadvantage when you’ve got a government subsidy of the same amount,” said Douglass.
NACS and SIGMA do not support moving the point of obligation, arguing that blenders’ ability to comply would be dictated by refiners, who would have leverage and incentive to raise prices. “We feel moving the point of obligation would actually harm retailers and could lead to problems with fuel supply, therefore leading to higher costs to the consumer,” Paige Anderson, NACS director of government relations, told CSP Daily News.
The Small Retailers Coalition is small, with about 50 members so far. But its main goal is simply to get the EPA to reconsider whether the current RIN setup is helping the agency meet the intention of the RFS.
“Congress intended it to encourage use of alternative fuels,” said Douglass. “But Congress never intended it to be stacked in the favor of a few. They intended it as an incentive for everybody to push renewable fuels.”
He estimates that his chances of reasoning with the EPA are good, and expects the agency will be fair. The office of McCabe told Douglass the agency is analyzing his comments, and taking them seriously. Douglass hopes his letter changes the dynamic.
“The government’s picking winners and losers, and right now, they’re picking the big guys to be the winners,” said Douglass. “If we don’t act like them, we won’t be able to stay. In other words, if we don’t get the RIN, we can’t compete with them.”