Economists find weak connection between high RINs, gas prices

By Susanne Retka Schill | March 28, 2013

The connection is weak between high gasoline and ethanol renewable identification number (RINs) prices University of Illinois economists Scott Irwin and Darrel Good wrote in a recent FarmDocDaily analysis

Reported estimates of the impact of high RINs prices on gasoline prices has ranged from none to a full pass-through of the higher retail prices. “As a result the proposed responses to the high prices have ranged from calls to sharply amend the RFS2 requirements to demands that the petroleum industry implement E15 at a much more rapid pace,” the economists write.  

It is difficult to make a precise estimate of the impact of high RINs prices, they say, because of the diversity of obligated parties. Some obligated parties with a non-integrated business model routinely buy RINs to cover their renewable volume obligations (RVO). Others blend more ethanol than their RVO and have RINs to sell.  “If only obligated parties were involved in the RINs market, the pattern of losses and gains on RINs and gasoline could be a zero sum game. That is, losses incurred by buyers of RINs or buyers of blendstock would be offset by the gains of those selling RINs or selling blendstock. Even then, it is not known how much of that zero sum effect could be easily accomplished within integrated firms and how much would be negotiated across non-integrated firms. In addition, there are other participants in the RINs markets, including non-obligated parties in the supply chain and third parties who are not a part of the motor fuel supply chain but have obtained ownership of RINs. As a result, the trading of RINs by obligated parties is not a zero sum game and the magnitude of net losses or gains to obligated parties in total is not known.”

Looking at recent prices of CBOB, ethanol (with RINs attached,) and RINs, the two looked for clues on the relationships and the impact on consumer prices. “The timing of the increase in CBOB gasoline prices predates the increase in RINs prices by several weeks, which casts doubt on RINs prices as a significant driver of gasoline blendstock prices,” they say. “In addition, CBOB prices were lower in late March than in October, further suggesting that factors other than RINs prices dominated CBOB prices.”

Admitting that the interaction of parties in the supply chain under the RFS is complex, the economists conclude, “Nonetheless, the basic zero sum nature of relationships in the supply chain and recent price trends for CBOB blendstock and ethanol suggests that the impact, if any, has likely been small, at most a few cents.” They also suggest that the EPA may want to reconsider an earlier decision rejecting “the alternative of moving all RVOs downstream of refineries and importers to those who supply finished gasoline at the retail level. This change would have resulted in a more homogeneous group of obligated parties and better aligned an obligated party's RVO with access to RINs. Such a re-alignment may have precluded some of the current diverse impacts of high RINs prices on obligated parties and minimized the cost of RFS2 compliance.”