Why gas prices aren’t dropping

Your bloggers have frequently reported that our country is now the largest producer of natural gas. We’re a net exporter of refined gasoline and it’s estimated that we will be the world’s largest producer of crude oil by 2020.  As a result of the ongoing economic malaise and the continued improvement of gas mileage (primarily a consequence of high fuel prices, not government fiat), fuel consumption has dropped dramatically over the past decade. Economics 101 tells us that as production increases, and consumption drops, surpluses are created, driving prices down. This is true, however, only in a free market free of government meddling.

While global demand for U.S. gasoline exports tends to dampen the downward pressure on what we pay at the fuel pump, one of the key reasons we’re not seeing lower prices is due to more unintended consequences from ethanol mandates.

GAfuels blogger Dean Billing commented recently on the reason that speculation using RINs has helped keep our fuel prices higher than one would expect. He was reacting to an article that appeared in the Wall Street Journal on Aug. 13 titled “An Alon USA Energy refinery in Louisiana was the only one — out of 143 — exempted from an EPA mandate. Why?” The article included this paragraph:

“Last week, the Environmental Protection Agency issued its annual renewable-fuels mandate, telling refineries how much ethanol they must blend into the nation’s gas supply. This quota, which grows each year, is becoming a horrific financial burden on the industry, forcing many refineries to buy federal ethanol ‘credits’ to satisfy the rules. The skyrocketing price of those credits is adding hundreds of millions of dollars to refineries’ annual costs.”

To which Dean Billing commented:

There is no such thing as a “federal ethanol credit.” This author does not understand the RFS [ethanol mandates] or what RINS are and how they work. A RIN [Renewable Identification Number] can only be created when an ethanol producer makes a gallon of fuel ethanol and attaches it to that gallon. It is nothing more than a tracking number. It is NOT a credit. When a gasoline producer buys the gallon of ethanol and blends it, the RIN is retired against the producer’s quota. If the producer blended more ethanol than their quota, they could strip the RIN and sell it. But as of next year producers will have to blend more than 100% of their ethanol quota and there will be no stripped RINS, except for a minuscule few that are generated from loopholes, so there will be no way for any producer to buy a RIN for ethanol they didn’t blend to meet their quota. They will have to buy ethanol and blend it or pay a fine and the fines are huge and are daily. The reality is that no one is talking about what they are going to do with all of the extra ethanol for which they won’t have any gasoline to blend it into, and what they are going to do about the mounting fines. That’s what the media should be discussing; that and the fact that nobody is producing Renewable Fuel [E85] as defined by the RFS.

This is precisely why that small producer in Louisiana asked for a waiver, and in fact every small producer should apply for one. And the big producers are going to have to ask for a waiver for all the ethanol they can’t blend. Of course I have no idea what is going to happen when there is no ethanol-free fuel at all because there can’t be.

Dean Billing

Related posts:

  1. Oil companies demand end to ethanol mandates
  2. Pure-Gas soars through 6,000, ethanol production drops
  3. Ethanol: It will get you coming and going
  4. Why can’t I find ethanol-free fuel?
  5. EPA policies slowing storm recovery
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