The New Game of Renewable Fuels Part 6 – Playing By The Rules
A renewable identification number (RIN) is a tax, a subsidy, a mandate, a financial asset that can be banked, borrowed, and traded, a contingent claim, and part of a four-component nested structure, all packed into one instrument.
That’s why we call it the most complex environmental credit ever invented.
Read the other blogs in this series, The New Game of Renewable Fuels:
- Part 1-The Rules Of The Game
- Part 2-Three Basic Principles
- Part 3-WHY Are The Mandates Nested?
- Part 4-On The Brink
- Part 5-Changing Factors
- Part 6-Playing By The Rules
It is in fact a cleverly designed fuel price control system.
It can be formally described by applying economic laws that govern how it controls fuel prices under the rules of the Renewable Fuel Standard (RFS).
With these formal descriptions, also known as mathematical models, you can calculate theoretical RIN prices and simulate how they change with changing factors.
you can calculate RIN prices and simulate how they change with changing factors.
Those changing factors include prices and supply volumes of fuel streams, RFS parameters like mandate levels, other federal and state subsidies, and economic parameters like fuel supply and demand elasticities.
Little guesswork
Compared to other mathematical models, these RIN pricing models require very little guesswork. That’s because the economic laws and rules of RINs are known, tangible things. Even the fuel supply and demand elasticities are known, published numbers.
The fact that these models require little guesswork is a very important distinction from most mathematical models used in the renewables business. For example, it requires some guesswork to model how the cutting down of Polynesian palm trees affects the social welfare of U.S. citizens.
By comparison, our RIN price models are like models used by engineers to design refinery process units or build bridges, that is to say, they have a firm foundation in hard data and reliable laws.
Another good thing is that our RIN price models were developed with tens of man-years and millions of dollars of work done by graduate students and their professors at several major U.S. universities.
User-friendly spreadsheets
Four years ago, Hoekstra Trading, in our research, found those models, learned them, replicated them meticulously in their full detail, and reduced them to user-friendly spreadsheets that our clients use as tools to learn, understand, and apply RIN pricing fundamentals in their trading and renewable fuels strategies.
That is to say, they use them to play the renewables fuels game by the rules of renewable fuels.
How does that work?
- The spreadsheets calculate theoretical values each week for each RIN.
- The market and theoretical RIN prices are compared with a view that the market price is likely to be attracted toward its theoretical value (history has proven that is what happens).
- The sensitivity of prices to market factors is studied with a view toward anticipating future RIN price changes.
- Twice each month, our clients touch base for one hour or less to discuss what’s happening in the market.
For example, how much are RIN prices likely to change with changes in:
- the RFS mandate levels?
- the other federal and state credits?
- the prices of alternative feedstocks?
- the efficiency of renewable fuel manufacture?
- the wholesale price of gasoline or diesel fuel?
- the other variables that affect RIN prices?
With our rigorous pricing models, these questions have quantitative answers based on economic fundamentals.
After 6 months of this, our clients are at the top of this game.
A good question
A good question I am often asked is why would someone choose to continue playing the game of renewable fuels without this knowhow that is so well fit for that purpose?
why would someone choose to continue playing the game of renewable fuels without this knowhow?
This is the final blog in this series called The New Game of Renewable Fuels. In it we claim the market is still today playing that game with an incomplete understanding of its rules. And we claim Hoekstra Trading’s ATTRACTOR D4 RIN price model is a fit-for-purpose tool that gives our clients a big competitive advantage in that game.
Summary
We close out this blog series with a summary of the first five episodes, copied below.
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Hoekstra Trading clients use the ATTRACTOR spreadsheet to compare theoretical and market RIN prices, analyze departures from theoretical value, and identify trading opportunities on the premise RIN market prices will be attracted toward their fundamental economic values.
Get the Attractor spreadsheet, it is included with Hoekstra Research Report 10 and is available to anyone at negligible cost.
The New Game Of Renewable Fuels – Summary
The renewable fuels game is being played today with an incomplete understanding of the dominant credit controlling its economics. The Renewable identification Number (RIN) is a game changing environmental credit.
Imagine you were an expert pinochle player who was thrust into playing a game of bridge for the first time with no orientation on the rules of bridge. To play the unfamiliar game of bridge by the familiar rules of pinochle would be a difficult and frustrating experience.
Bridge and pinochle are similar from a distance, but differences in the fundamental rules radically change the game in surprising and unexpected ways. Without knowing the rules of the new game you’re playing, wouldn’t you get confused and frustrated to the point where you would step back and say what’s going on here why is this so confusing?
In a similar way, the game of renewable fuels is confusing because the invention of the RIN fundamentally changed the rules of the more familiar game of conventional fuels. The RIN is more than a simple tax, a simple subsidy, or a simple mandate. It is all three at once, and more.
The prices of RINS and the fuels they regulate are interdependent in ways that lead to radically different price behavior than what occurs in conventional free markets or markets regulated by simpler environmental credits.
The prices of RINS and the fuels they regulate are interdependent
Though confusing at first, the unusual price behavior is readily understandable by someone who steps back to learn its fundamental rules, as bridge is understandable to a good card player who steps back to learn the rules of bridge instead of continuing to play it by the rules of pinochle.
Unusual price behavior
In 2013, misunderstanding of how RINs work caused the market to be blindsided by a 10,000% increase in the price of the D6 RIN. That explosion shocked the market. They didn’t know what hit them, even though it was a fully predictable logical outcome of the nested design of the RIN system.
In 2023, RIN prices crashed To 1/4 their value. That was enough to knock $2.00 per gallon off renewable diesel margins, which crashed the stock prices of some players and set off aftershocks still being felt today. That crash and its impact on renewable fuel margins was neither foreseen nor understood by the large players nor by there investment advisors. But it too was a predictable, logical response of the RIN price control system that was foreseen and publicized in advance by those with a firm grip on the fundamental rules of the game.
Those two shocks, the 10,000% RIN price explosion in 2013, and last year’s crash to one quarter it’s value, were not caused by unpredictable things like, for example, an unforeseen explosion in the price of diesel fuel, or an unforeseen crash of soybean oil prices. Rather, those two episodes were predictable, logical responses of the RIN price control system to well-known changes occurring in the renewable fuels market. There were other such episodes in between, and there will be more in the future.
They were predictable, logical responses of the RIN price control system
Does your company have a capable person with a need and desire to learn and apply the fundamental rules of the renewable fuels game? if so, we invite you to join our client group by purchasing Hoekstra Research Report 10 which includes the attractor spreadsheet and six months of unlimited support that will put that person among the top few in the industry at playing the new game of renewable fuels.
Get Hoekstra Research Report 10 and the ATTRACTOR spreadsheet
