Refiners rebuffed again on RIN price pass-through – part 2

Yesterday, EPA denied 36 petitions from refiners seeking small refinery exemptions (SRE) to their Renewable Fuel Standard (RFS) obligations for the 2018 compliance year. The denial repeats and builds on the large of body of evidence showing small refiners do not face disproportionate economic hardship as a result of their RFS obligations (see this blog post).

In September this post analyzed the big contradiction at the heart of this $100 billion matter:

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?

excerpt from Hoekstra Trading post “This week’s OPIS conference and the Big Biofuels Contradiction”

The pass-through theory says refiners recover the cost of the RINs they acquire by passing those costs on to wholesale purchasers of the refinery’s products. This theory is supported by economic theory and the published empirical data. A corollary is that the cost of acquiring RINs is the same for all parties regardless of whether the RINs are acquired by blending renewable fuel or by procuring RINs from others.

The pass-through theory is reinforced by new information provided by refiners during the comment period leading up to yesterday’s denial.

Yesterday’s denial also says EPA is adopting a new approach to evaluating Small Refinery Exemptions:

In this action, EPA is adopting the approach proposed on December 7, 2021, requiring the small refinery to demonstrate that compliance with the RFS program is the cause of the disproportionate economic hardship experienced by the small refinery.

excerpt from EPA April 2022 Denial of Petitions for RFS Small Refinery Exemptions

To me, this reinforcement of the pass-through theory, plus the change in approach for evaluating small refinery exemptions, adds up to a huge deal because it means that to get a small refiner exemption, the burden of proof is now on the small refiner to prove he faces disproportionate economic harm caused by RFS obligations.

Good luck with that. It sounds to me like no more small refiner exemptions.

This denial points to several other conclusions and questions. For example,

• What are the implications of the alternate compliance approach by which these small refineries can demonstrate compliance with their 2018 obligations, which is also given with this denial?
• How do RIN dollars pass through the wholesale level and the rest of the supply chain to retail fuel prices and/or renewable fuel suppliers?
• Many refiners blame high RIN costs for poor capture of the record-high fuel margins available in today’s gasoline market — how can that argument be squared with overwhelming evidence that firmly nails down the pass-through theory?
• If RINs aren’t the true cause of low refining margin capture, what is?
• What are the likely implications for RIN prices in the future?

Recommendation

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