Gasoline soars as refiners struggle with biofuel quotas


While the oil market fell, RBOB gasoline futures have gone crazy. The main reason for the follow through pop before the ultimate drop was the rumor that Bloomberg News later confirmed about the Phillips 66 Sweeny lost power to on Sunday. The time to restart everything could take a couple of days and the rumors sent price in the wholesale market flying.

Yet behind the volatility are a story of record high renewable fuel credits, surging ethanol costs and the possibility of government mandated shortages. The story is one that Robert Campbell of Reuters has been following each day and writes a piece that explains not only the short term impact of the shortages of RINs (renewable identification numbers) but the long term threat as well.

He says that “Most American lawmakers love to complain about high oil prices.  Taking a pop at "Big Oil" helps politicians project an image of caring about ordinary people without having to do anything. Best of all, they can rarely do anything to actually make a difference, so they cannot be criticized for inaction, sound and fury, signifying nothing. This time it is different. Gasoline prices may well surpass last year's levels soon. And while crude oil is costly — the usual and main reason for high fuel prices — the unintended consequences of bad legislation are becoming especially pernicious.

Last decade, under the administration of George W. Bush, political opinion coalesced around the need to "break America's oil addiction." For ideological reasons, conservation and demand reduction measures were largely eschewed. But biofuels and other alternatives to liquid hydrocarbons were heartily endorsed. One result was the Renewable Fuel Standard, which mandated the blending of an ever-rising volume of biofuels into the U.S. gasoline pool. A key assumption behind this policy was the belief that U.S. gasoline demand would keep growing.

That has not happened. Instead, the gasoline market has shrunk while the biofuels mandate has risen. This year, it may rise to the point where it causes a clash between reality on the ground and the command economics of the RFS. Although oil companies loathe the RFS, they have grudgingly accepted ethanol and other biofuels up to a point.

In the past, corn-based ethanol was a boon, providing cheap, high-octane blendstock for gasoline even as it was shielded by import barriers and supported with tax subsidies. The mandate was not a problem so long as the RFS volume quota amounted to less than 10% of gasoline consumption because there was no known product liability associated with selling gasoline containing 10% ethanol, a level known as the blendwall. However fuel blends with greater than 10% ethanol are not liability-free. Refiners are worried that older cars could suffer engine damage if they used high-ethanol blend gasoline, which would expose them to lawsuits.

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