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A Few Reasonable RIN Ideas

Submitted by on December 22, 2016 – 7:45 pmNo Comment

by  John Campbell (Ocean Park Advisors) The RINs market would be improved with timely blend targets and compliance reporting, increased transparency and trading limits.  —  …  Although it might reduce undesirable trading practices, moving the point of obligation would not change RIN supply and demand fundamentals. There may be a better way to improve the ride: EPA should reconsider allowing biofuel producers to separate the RIN from the physical gallon. While this is not a plan currently endorsed by ethanol producers, it’s a plan they might want to consider.

The EPA says the RIN market is working as it was designed to, incentivizing the production, distribution and use of renewable fuels. Still, the program remains  mired in controversy for three principal reasons: time, transparency and trading.

For example, compliance data for 2014 is not yet available This means that the market can only guess about the supply and demand for RINs and that there is a long time to trade RINs before compliance deadlines. This often leads to speculative trading.

During this volatile period of ownership, nobody knows who owns what. This is because once the blender is allowed to separate the RIN from the physical gallon, it becomes blindfolded musical chairs until the music stops and everybody tries to take a seat (RIN compliance deadline). This tends to favor business people who have a trading desk and a big balance sheet.

Trading was envisioned by Congress and regulators, but the RIN system was never intended to become an unregulated and unsupervised speculative ride. The view was that nobody would be interested in this obscure piece of digital data and that trading would occur primarily between obligated parties. For many years, RIN values were just pennies, mostly reflecting transportation differentials between regions. Today the RIN values are much higher, so the cost of compliance got a lot pricier.

One thing for sure is that all this booty is not going to the biofuel producer. You can look at the margins for publicly traded biofuel companies and see that the vast majority of RIN value is carved up among the players downstream from the biofuel producer. Some say that injured refiners should just buy biofuel producers if they have a problem with RINS. That is like telling a biofuel producer to buy a refiner if they don’t like the price of fuel. It is not that easy, even though about one-third of the biofuel industry is already owned by petroleum companies.

Fine-tuning the Ride

Assuming the point of obligation stays the same, there are other alternatives that might improve the situation:

1. EPA must make its decisions on time.

2. Increase transparency. Each time a RIN trades, the new owner needs to be identified immediately.

3. Limit trading. Other traded agricultural commodities have position limits, daily price movement limits, and the status of the ownership is known (commercials versus noncommercials, for example). While not exactly comparable, RINs trading could be limited to those with a nexus to the industry and the status of ownership (obligated party versus nonobligated party) could be made known immediately.

Rather than changing the point of obligation, EPA should reevaluate allowing biofuel producers to separate the RIN from the physical gallon. Under current rules only the blender can separate the RIN. Decoupling RINS at the point of manufacture would not solve many of the problems noted here,  but small refiners could at least deal directly with biofuel producers, rather than having to buy from their petroleum competitor or a speculative holder. READ MORE

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