Ethanol Upending Refiners Pushes $13 Billion on U.S. Drivers

From Bloomberg

By Bradley Olson & Dan Murtaugh

U.S. drivers may face a $13 billion increase in the cost of gasoline this year as the price of federally mandated ethanol credits has risen 10-fold for oil refiners including Valero Energy Corp. (VLO) and CVR Energy Inc. (CVI)

Fuel processors such as Valero, the world’s largest independent refiner, and Exxon Mobil Corp. (XOM) are pushing the U.S. Environmental Protection Agency to reduce the amount of ethanol they’re required to add to gasoline to avoid what they say will be a sharp spike in prices at the pump just as the summer driving season begins.

Refiners buy biofuel credits, known as RINs, which are available as an alternative to actually blending ethanol into gasoline. The cost of those credits has ballooned from 7 cents at the start of the year to more than $1 as the 2013 federal mandate for biofuel exceeds 10 percent of gasoline sales, the maximum that refiners say the market can absorb.

Energy traders and hedge funds are treating ethanol credits like “a casino,” Michael Jennings, chairman and chief executive officer of Dallas-based refiner HollyFrontier Corp., said at the annual gathering of the American Fuel and Petrochemical Manufacturers in San Antonio today. “It will drive, in its current form, higher prices at the pump.”

Companies that blend gasoline and ethanol are also buying and holding on to the credits, expecting prices to go higher and making them harder to get, Valero Chairman and CEO Bill Klesse said in an interview yesterday at the refinery group’s meeting.

Pump Price

“You have traders hoarding,” Klesse said. “The EPA has to address it and address it now.”

Concern about the rising cost of the credits has driven down refiners’ share prices, draining $5 billion in market value last week from the 10 largest publicly traded U.S. independent refiners, according to Barclays Plc.

Consumers are at risk of paying 10 cents a gallon more for gasoline this year if the ethanol credits continue to sell at a price of more than $1, Roger Read, a Houston-based analyst for Wells Fargo & Co. (WFC), said in a March 11 note to investors.

Pump prices may surge even more as the credits make imports more expensive and create an incentive for U.S. refiners to seek export opportunities where no ethanol blending is required, Read said.

Economic Cost

“The likely impact for U.S. consumers is higher gasoline prices as supply declines,” he wrote.

The high cost of credits may add 10 cents to the price of a gallon of gasoline, Valero’s Klesse said. An increase of 10 cents for every gallon of gasoline consumed in the U.S. in 2013 would equate to more than a $13 billion cost to consumers, according to data compiled by Bloomberg.

Refiners can make use of surplus RINS and the added cost of high credit prices is likely to be smaller and may be as low as $400 million, Geoff Cooper, vice president of research and analysis at the Washington-based Renewable Fuels Association, said today in an interview.

“It’s a market like any other,” Cooper said. “It’s going to respond to demand, and I think what we saw last week when prices jumped over a dollar was some panic buying.”

Prices at that level don’t reflect market fundamentals and the cost is expected to average 31 cents this year, he said.

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