The idea of using E85 as a way out of the blendwall/RINs issue in the US has another backer.
But it’s not a new backer. Well-known energy economist Phil Verleger several years ago first brought up the likelihood that the refining industry might need to promote the sale of E85 as a way around the Gordian knot of a 10% ethanol blendwall combined with a rising mandate for the use of renewable fuels plus a decline in gasoline demand in the US.
In his widely-read “Notes at the Margin” this week, Verleger revisits the issue in a way that will certainly bring joy to the Renewable Fuels Association and its own call for greater use of E85.
“The benefit of increased E85 sales with regard to the RFS program is simple,” Verleger writes. The math: add a gallon of E85 consumption and it generates 0.85 of a full RIN.
He also calculates that the RFS for 2013 — proposed by the EPA but not yet finalized — will be on average 9.6% for the total US market for diesel and gasoline. For gasoline, that’s getting close to the 10% blendwall limit. And the result, as we have seen, has been that the price level has been soaring for both 2012 and 2013 RINs, since the gap between 10% and the average renewable fuel portion is expected to be tighter next year.
“The obvious solution to the RIN price problem involves no EPA intervention and no regulatory action at this point,” Verleger writes. “It simply calls for boosting E85 sales.” Verleger lays out data that shows the “needed percentage” of renewable fuels in diesel and gasoline could be cut on average to 7.6% from 9.6% if the E85 market share could rise from its current level of close to zero to 5%.
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No part of this current debate is likely more hotly debated than whether E85 sales to flex fuel vehicles have so far been a growing success story or a flop. But regardless, Verleger suggests that the benefits to refiners and blenders from jacking up their “production” of RINs through greater E85 use could be shared with consumers, helping to guarantee demand.
Verleger notes that the current lower price of E85 at the pump reflects the fact that its BTU content is far less than a gallon of conventional gasoline. But according to his view, if the retail price of E85 falls even further relative to gasoline as a result of refiners kicking back some of the “RINs benefit” they get from the promotion of E85, it could spur demand for the fuel that would otherwise not exist.
“The situation is so convoluted that it would pay marketers to give E85 away should the RIN price rise to around $5,” he writes. “At that level, every gallon of E85 delivered for free would generate $3.75 in RIN credits.” (RINs for 2013 closed the week at about 75 cents, though the price was more than $1 earlier in the week.)
But Verleger doesn’t think it will ever get to the $5 level; it won’t be necessary.. “An E85 market penetration of say, 2% of the gasoline pool will provide more than sufficient flexibility for the RFS program for the next two years,” he wrote. “Additional market penetraton of, say, 5% will likely provide flexibility to 2018.”
At Platts’ Barrel talk during the AFPM conference in San Antonio Monday, there will be a full house of attendees with a panel comprising refinery analysts and experts. Three weeks ago, RINs were only loosely on the agenda. Now they’re certainly going to be up front and center.
If you didn’t get a chance to go this year, get your registration in early for The Barrel talk at AFPM’s annual meeting in Orlando next year; the fun is likely to still be in full swing.