Fixing the RFS is Getting Easier and Easier

There has been no shortage of ideas in recent months about how to "fix" the Renewable Fuel Standard (RFS). These include application of the various waiver authorities under the RFS, expanding the number of small refinery exemptions, and a $0.10 per gallon cap on the price of the RIN credits used to comply with the RFS. The reason cited over and over for the need to fix the RFS is the high cost of ethanol RINs borne by independent "merchant" refiners. In late January, Philadelphia Refining Solutions declared bankruptcy, citing high RIN costs as a major contributing factor. There is no argument that the cost of D6 ethanol RINs has indeed skyrocketed since 2012 (Figure 1). The disagreement is whether refiners have to absorb most of the RINs costs or are able to pass them on to fuel blenders in the form of higher gasoline and diesel blendstock prices. What seems to have gotten lost in all the noise surrounding the political war over the RFS is how rapidly the conditions are changing that created the high ethanol RINs prices in the first place. The key is the "gap" between the ethanol blend wall and the conventional ethanol mandate. In this article, we analyze why this gap is so important to understanding the movement of ethanol RINs prices, how the gap is rapidly shrinking, and what this means for the future level of ethanol RINs prices.