In a new post on the Institute for Energy Research (IER) blog, Robert Murphy suggests that I mislead Politico readers in a recent op-ed about the Renewable Fuel Standard (RFS), RIN credits, and gas prices. IER claiming that I misrepresented the facts on the RFS is a bit like a skunk saying a rose smells bad. IER is, of course, just another front group for Big Oil—its president formerly lobbied Congress on behalf of the National Petrochemical Refiners Association and Koch Industries.
Rather than engage in a serious, fact-based discussion on what RINs are, how they are generated, how they are used by refiners to demonstrate RFS compliance, or who can own and trade RINs, Murphy simply regurgitates Big Oil’s false argument that the RFS is driving up fuel costs. There’s not a shred of evidence to support that notion, but that’s never stopped these folks before. Murphy apparently takes issue with my characterization that the overwhelming majority of RINs are obtained for “free” by refiners. So, once again, here are the facts to support that characterization:
1. A RIN is generated every time a gallon of ethanol is produced.
2. Every gallon of ethanol sold to a blender or refiner comes with a RIN attached.
3. So, when a refiner or blender spends $2.48 for a gallon of ethanol (yesterday’s price in Chicago), they are also getting a RIN along with the gallon.
4. The refiner separates the RIN from the gallon and turns it in to EPA to prove it blended a gallon of ethanol. If the refiner has more RINs than it needs to comply with the RFS, it can sell the extras to oil companies who are short.
That’s why I say the RIN is “free.” Most refiners have stockpiled millions of RINs that they obtained for free when they purchased ethanol over the past several years. When Murphy refers to RIN prices “over $1,” he’s talking about two days in March when the thinly traded open market for RINs saw some inexplicable volatility. How many RINs were actually sold at that price? No one knows for sure due to the opacity of the market, but my guess would be not that many. Incidentally, the average price for a RIN on the open market this year has been around 45 cents. In any case, the important point to remember—and one that is obviously lost on IER—is that a refiner doesn’t have to buy a RIN on the open market. It could instead buy and blend a physical gallon of ethanol that comes with the “free” RIN.
Now, one could certainly argue that the RIN has its own value that is “built in” to the price paid for a gallon of ethanol. Fine, I can appreciate that concept. But even so, the price of one gallon of ethanol and its attached RIN is still far less than the price of a gallon of gasoline (CBOB gasoline was $3.02 per gallon in Chicago yesterday—$0.54 per gallon more than ethanol plus a RIN).
So, based on yesterday’s prices, a gallon of E10 (10% ethanol blended with 90% gasoline) is going to be at least 5.4 cents per gallon cheaper than unblended gasoline at the retail pump (this simple pump savings calculation does not include the much larger economic benefits of using ethanol). Murphy attempts to downplay this savings for consumers by highlighting that ethanol’s energy density is lower than gasoline’s. The energy density routine is the oldest trick in Big Oil’s well-greased playbook. The fact is refiners don’t use ethanol primarily for its energy content; rather, they use ethanol for its exceptionally high octane content. And, by the way, ethanol is undeniably the cheapest and cleanest source of octane on the market today. Far from “mak[ing] refining costs higher,” ethanol is being used by refiners in lieu of other octane sources to reduce gasoline production costs. This effect is well documented; a recent Department of Energy (DOE) analysis found that the value of ethanol to refiners is ~110% the price of gasoline because of its high octane content (DOE’s Energy Information Administration also recently wrote about ethanol’s octane value to refiners here.) So, please, spare us the energy density nonsense.
IER’s contention that gas prices are going up as a result of higher RIN prices is downright absurd. Retail gasoline prices have clearly been impervious to RIN prices. After peaking in mid-February, gas prices have been steadily sliding. Indeed, when RIN prices spiked in March, gas prices were tumbling. The myth that RINs are affecting gas prices was recently disproven by an Informa Economics analysis. Further, there isn’t a single mention of ethanol, RINs, or the RFS in two separate EIA analyses on recent retail gas price volatility (here and here).
Murphy brashly suggests that if I truly believe ethanol is more cost-effective for consumers, then I should call for repeal of the RFS. Well, for the record, I absolutely believe that ethanol is more cost effective than gasoline for American consumers. Not only that, I happen to believe ethanol is better for the environment, better for human health, and better for the economy than gasoline. In a truly free and open energy market, ethanol would be allowed to compete with gasoline on a level playing field. But even Mr. Murphy must admit that the energy market is anything but free and open—petroleum’s stranglehold on the market is the result of a century of fossil fuel subsidies, a regulatory landscape that protects incumbent fossil fuels against competition, and Big Oil’s virtually limitless financial resources to quash real competition. Murphy’s hypocritical plea to get government intervention “out of the energy sector” is almost laughable given the billions of taxpayer dollars that end up in Big Oil’s pocket every year.
Even though ethanol makes economic sense for consumers and refiners, I have no doubt that oil companies would take a short-term financial loss if it meant eliminating a long-term threat to continued dominance of the fuel market. THAT’s why we need the RFS. The truth is, ethanol and the RFS are loosening the century-long stranglehold on the fuel market and introducing real competition. And the oil companies—and their surrogates at IER—don’t like it one bit.