What will cause separation of the D4, D5, and D6 RIN prices? Part 2 – The Big Bang and the Meiselman model
In the U.S. biofuels market, it has become normal for the prices of three Renewable Identification Number (RIN) credits to be the same. They are the D4 (biomass-based diesel), D5 (advanced biofuel) and D6 (conventional renewable biofuel) RINs. This equality is caused by special circumstances that have applied at times. The current question is what will cause the next separation among these three RIN prices?
- Part 1 – Studying Boundaries with ATTRACTOR
- Part 2 – The Big Bang and the Meiselman model
- Part 3 – D6 RIN Pricing Framework
- Part 4 – The Next Big Move
- Part 5 – The ATTRACTOR RIN System Roadmap
In the U.S., prior to 2013, the Quantity of Ethanol in Gasoline (we will call that QEG) was increasing gradually while the total Quantity of Gasoline (QG) sold was staying roughly constant at the level of consumer demand. The increase in ethanol quantity was being accomplished by increasing the Fraction of Ethanol in Gasoline, (FEG).
Quantity of Ethanol in Gasoline= Fraction of Ethanol in Gasoline times Quantity of Gasoline:
Equation 1: QEG = FEG x QG.
A 10% maximum limit on FEG (which is commonly called the blend wall) applied as a cap on how high the fraction of ethanol could increase. That limit is stated as follows:
Fraction of Ethanol in Gasoline cannot exceed 0.10
Equation 2: FEG <= 0.10
The Meiselman Model
These are 2 of 26 equations that make up the fundamental RIN pricing model that was developed and published by Ben Meiselman in 2017. The Meiselman model was replicated by Hoekstra Trading in the ATTRACTOR 2.0 spreadsheet which was released Oct 31, 2024. ATTRACTOR 2.0 is being used by Hoekstra Trading clients to calculate, study, and forecast Renewable Identification Number (RIN) prices under different future scenarios.
Figure 1 is an excerpt from the Meiselman dissertation showing how FEG increases as the Total Renewable Mandate increases:
This is not market data. It is a logical relationship calculated from equations 1 and 2. It shows how FEG must increase as a logical consequence of an increase in QEG, when the total quantity of gasoline sold is fixed.
Figure 2, also an excerpt from the Meiselman dissertation, shows how the theoretical D6 RIN price snaps up when the blend wall is hit at FEG = 0.1.
Figure 2 is not market data. Like Figure 1, it is a logical, theoretical response to increasing the quantity of ethanol in gasoline. The snap up in the D6 RIN price is what we call The BIG Bang of renewable fuels that occured in the real world in 2013.
Misunderstanding
Even though it was a logical, predictable response, the Big Bang, when it occurred in the real world, blindsided the whole U.S. fuels market and led to a frenzy of reactions, congressional hearings and finger-pointing among refiners, biofuel producers, bankers, accused RIN hoarders, and politicians over “RINsanity”, which was suddenly costing refiners and (allegedly) consumers $14 billion per year.
As indicated by Figure 2, these reactions were based on a misunderstanding of the economic fundamentals that actually drive RIN price behavior.
How exactly did the snap-up in the D6 RIN price occur? — in other words, what fundamental economic responses, and chains of events were triggered by the hitting of the blend wall boundary to cause this? ATTRACTOR reveals the detailed answer, which is surprising, enlightening, and easily understood by anyone, even those who have no interest in or understanding of equations 1 and 2 or any of the other 24 equations in the Meiselman model.
Relief valves
In a water kettle, as the boiling point is reached, water vapor is released at increasing velocity through the hole in the cap which relieves the pressure and causes a whistling sound. The cap is a relief valve. It responds to the hitting of a boundary (the boiling point of water), that causes a phase transition, creating a dilemma that demands resolution.
The Big Bang was caused by a dilemma that occured at a boundary and caused a relief valve to pop. We call the one that popped the “biodiesel solution”. But there were, and still are, other relief valves that could have popped instead. They are still set today to pop when their turn comes. I believe few if any in the market are aware of the other RFS relief valves that are still set to pop, and will pop, in response to changes around the blend wall boundary.
Moreover, we have considered here only 2 of the 26 equations and 26 unknowns that are laid out in the Meiselman model and solved in ATTRACTOR. The other equations define many other boundaries that can trigger discontinuous and/or odd, unexpected responses.
Sensitivity studies
Figure 3 shows unexpected, discontinuous responses calculated in an ATTRACTOR sensitivity study of a RIN system boundary that is in play today (see Part 1 of this series for more about this chart). It is similar to Figure 2 except the X-axis is different — here, X is the % change in one of the 26 variables. ATTRACTOR does not restrict us to studying only the X axis shown on Figures 1 and 2 (the level of the Total Renewable Mandate), we can study the response to any of the 26 variables.
Conclusion
This quote from a previous Hoekstra Trading blog post states the conclusion:
Paper simulations with this model allow you to foresee, understand, and anticipate RIN price behaviors instead of trying to navigate the system without a roadmap. ATTRACTOR will help you anticipate the cliffs, boundaries and trapdoors that will otherwise blindside you.
George Hoekstra, December 14, 2024
Recommendation
If RIN prices are important to you or your business, why would you choose to be without this roadmap to help you navigate the treacherous RIN landscape? Get Hoekstra Research Report 10 and the ATTRACTOR spreadsheet
Get the Attractor spreadsheet, it is included with Hoekstra Research Report 10 and is available to anyone at negligible cost.
