Refiners rebuffed again on RIN price pass-through

In an eight-year battle over Renewable Identification Numbers (RINS), refiners have failed to get much relief from their RIN obligations. Last Friday, July 16, 2021, an appeals court rejected their latest effort.

The core issue was the “pass-through theory”, which says refiners’ RIN costs are recaptured in the market prices of the gasoline and diesel fuel they sell. Overwhelming evidence shows these costs are fully recaptured. Here is a list of the research findings as they were summarized in a 2019 court opinion:

“merchant refiners, who largely purchase separated RINs to meet their RFS obligations, are recovering these costs in the sale price of their products.”

“Refineries are generally able to recover the cost of meeting their RIN obligations in the price of their petroleum blendstocks.”

“merchant refiners are generally not uniquely adversely impacted (relative to integrated refiners).”

“while merchant refiners are directly paying for the RINs they buy on the market, they are passing that cost along in the form of higher wholesale gasoline and diesel prices.”

“empirical data support the argument that RIN purchasers recover the cost of these RINs in the price of the petroleum blendstocks they sell”

 “the ability of the merchant refiners to recover the cost of the RINs was complete (not statistically different than 100%) and occurred quickly (within 2 business days).”

 “RIN prices generally reflected market fundamentals and obligated parties including parties that purchase separated RINs recover the cost of RINs in the market price of gasoline and diesel fuel they sell.”

Haven been hammered over the heads repeatedly with these pass-through research findings by EPA and various courts, refining executives now (understandably) acknowledge the conclusion, for example, in these quotes from 2021 first quarter earnings conference calls:

“We believed and continue to believe that the RIN is priced out in the crack”

Robert Herman, Executive Vice President Refining, Phillips 66

“The RIN is really embedded in the crack”

Alex Pourbaix – President & Chief Executive Officer, Cenovous Energy

But do they really believe it? Others, and sometimes the same executives, still seem to disagree, for example, as in these quotes also from 2021 first quarter earnings conference calls:

“runaway compliance costs under the RFS program are creating another unsustainable burden on merchant refiners.”

Tom Nimbley, chairman and CEO, PBF Energy

“It’s a direct hit to the capture rate”

Mark Lashier, President and Chief Operating Officer, Phillips 66

“Net net, its a negative to us at the end of the day. We do not capture the RIN at the 100% level.”

Robert Hermann, Executive Vice President Refining, Phillips 66

“We just know the pricing of RINs is not a market-based price at the present time and we are not going to spend good cash chasing a marketplace that isn’t transparent”

Glen Hauenstein, President, Delta Airlines

What is an investor to think?

Are the executives just posturing for political reasons? That makes no sense — if they really believed the pass-through theory, they would stop lobbying for changes that won’t help anyway.

Are they using RINs as an excuse for other profit problems? That is part of the answer.

My theory

But the disagreements stem mostly from misunderstanding of how RINs work their magic, which is to cleverly force mandated quantities of certain renewable fuels into the market by distorting the usual market incentives for fuel production and consumption.

RIN economics is hard to fully grasp.

It is very easy to confuse which product, which market, and which price is being manipulated by which RIN.

By struggling long and hard to understand RIN economics myself, I learned you must always:

1. Carefully differentiate fuel components – for example, blend stocks for oxygenate blending (BOBs), ethanol, and oxygenated gasolines (E10 and E85)
2. Carefully differentiate RIN categories – for example, ethanol (D6) RINs and biodiesel (D4) RINs
3. Carefully differentiate fuel markets – for example, the markets for BOBs, ethanol, and oxygenated gasolines.

Any analysis glossing over these details using imprecise terms like “fuel”, “RIN”, “market”, “demand”, “supply”, “price” runs high risk of conceptual traps and wrong conclusions.

Which leads me back to Friday’s court opinion rejecting refiners’ latest challenge to the 2019 mandates.  That challenge was based on an academic paper that contradicts the pass-through theory. Having studied the paper, I conclude it suffers from the three pitfalls listed above, that is, it inadequately differentiates between categories of fuels, RINs, and markets, which leads to wrong conclusions about how RINs affect prices and profits.

For example, here are three key sentences from the paper, with my edits in red:

• “Note that the quantity of production and consumption of BOB declines.”

• “P^R is the price that consumers blenders pay”.

• “A positive D6 RIN price increases the price that consumers blenders pay for fuel BOB.”

You get the idea. It is easy to confuse which product, which market, and which price is being manipulated by which RIN. Such confusion leads to wrong conclusions. The above three sentences, when edited, have different meanings than in the paper, which leads to different conclusions, which in fact agree with the pass through theory that the paper is supposedly disproving.

Recommendations

Refining executives should demand a full understanding of how they are recapturing RIN expenses in wholesale margins. They should not be satisfied until they personally have a firm grip on the justification for that claim.

Refining executives should demand a full understanding of the other factors contributing to shrinking margin capture rates.

Anyone with a stake in RINs pricing and economics should get Hoekstra Research Report 10 which includes the Hoekstra ATTRACTOR spreadsheet spreadsheet that accurately calculates D4T, the theoretical RIN price, tracks it versus quoted market prices, and predicts how RIN prices will change with the variables that affect them. Why not send a purchase order today?

George Hoekstra george.hoekstra@hoekstratrading.com +1 630 330-8159

Anyone with a stake in RINs pricing and economics should get Hoekstra Research Report 10