The 2021 OPIS conference and the biofuels contradiction
See the other posts in this series, Top 3 Takeaways:
Any engineer attending a biofuels conference will notice an atmosphere filled with lawyers, accountants, lobbyists, and RINs traders. It is an interesting and educational but unfamiliar world for an engineer.
Occasionally, the more familiar world of science, technology, and economics will pierce through.
That happened Thursday at OPIS’ 13th Annual RFS RINs & Biofuels Forum when Jim Stock clicked up what he called “the coolest chart I’ve ever seen” (I’m paraphrasing).
The chart points toward a fundamental contradiction at the core of two huge questions in the biofuels world:
- Will the small refiner exemptions be granted?
- What is the causing the currently-poor profitability of North American refiners?
Each of these questions carries stakes of $10s of billions. Including sunk costs from an eight-year struggle, and impact on future investor decisions, the contradiction at their core is worth north of $100 billion.
An economic model that really works
Those with keen ears at the OPIS conference also heard Jim mention a model that calculates RIN prices using insights from his cool chart, economic fundamentals and options pricing theory that factors in expectations about future uncertainties. I discovered his RINs pricing model last autumn while buried knee-deep in biofuels literature, determined to come to grips myself with the Big Biofuels Contradiction.
The RINs pricing model, developed by Jim Stock, Kristen McCormack and Scott Irwin, is among the coolest models I’ve seen. To help understand RINs pricing, I wrote it into a spreadsheet and used it to study how RINs pricing works.
What is the Big Contradiction?
Okay, what is the Big Contradiction? On the one hand, refiners’ RIN costs are fully passed through and recaptured in the price of their products; on the other hand, RINs are added costs that reduce refiners’ profitability.
Doesn’t that sound like a contradiction to you?
Lawyers, lobbyists and traders are trained to cope with and thrive on contradictions like this.
Engineers and economists prefer to resolve or at least understand them.
C-Suite executives have twisted themselves into pretzels trying to explain this one.
Investment analysts admit to being totally confused.
Helped by deep study of the RINs pricing model and other scientific work by Jim, Scott Irwin, and their peers, I finally came to grips with this contradiction last year. It is only an apparent contradiction. The correct interpretation is explained in Hoekstra Research Report 10 which also includes my spreadsheet application of the Irwin-McCormick-Stock RINs pricing model.
At this week’s OPIS conference, I drew attention to the Big Contradiction by asking many people, publicly and privately, how they understand it. I left the conference, as I came in, convinced few people do.
It is a difficult puzzle, much like a Rubik’s Cube, easy to solve in part, but hard to solve in full.
What do you think about this contradiction and why?
What do you think about this contradiction and why? When asked, some appeal to experts on one side or the other, some dismiss it with responses like “not all markets are equal”, some quote ambiguous mantras like “it’s priced-out in the crack”, some (the lobbyists are best at this one!) deftly change the subject and pivot to their favorite bargaining chip. None of those responses indicates true understanding.
Among dozens I spoke with, only three stated a clear coherent position, and I think only two of them really understood it.
Many said things that make it clear they misunderstand it.
Please don’t think I’m trying to make others sound dumb. Not at all! I sweated many weeks last autumn before the light switched on for me. The only difference is I was determined and able to invest the whole fourth quarter to overcome my own ignorance and confusion.
I just believe very few people really understand this confounding dilemma.
If it were easy, there wouldn’t be a $hundred billion hinging on it.
Thank you
To OPIS and your sponsors — thanks for leading another outstanding forum and congratulations on your groundbreaking achievement, holding a post-lockdown face-to-face conference.
To Jim Stock — thanks to you and your colleagues for your scientific work. Your model is among the coolest I’ve seen, and vastly under-appreciated. As for your chart, it’s really cool too (but I have seen cooler).
Conclusions
- Decisions worth $100 billion rest on an apparent contradiction about how RIN prices affect refiners’ profits.
- Very few stakeholders understand the contradiction.
- Jim Stock’s presentation from last week’s OPIS conference contained information critical to it’s understanding.
Recommendation
- Anyone with a stake in RINs pricing and economics should get Hoekstra Research Report 10 which will bring your understanding of this apparent contradiction to the top of the pack versus your competitors.
- Don’t try to do it yourself from scratch. Please get Research Report 10 first and then pick up where it leaves off. Here’s the offer letter
