CARD releases paper debunking Big Oil's assessment of RINs

By Holly Jessen | November 07, 2013

A new paper from two Iowa State University economists concludes that an American Petroleum Institute study predicting higher fuel prices as the result of increased renewable fuel standard (RFS) ethanol mandates is flawed. That dire scenario could only occur if the oil companies formed an illegal cartel, Bruce Babcock and Sebastien Pouliot found in the analysis called, “The Economic Role of RIN Prices,” which was released Nov. 6.

"The problem with the API study is that it relies on the assumption that businesses have no available options to meet their RFS obligations except to cut fuel sales to make the cumulative market smaller, and thereby retreat from the blend wall. This is simply not true, there are viable options versus restricting supply and driving up prices," Bruce Babcock said. "A more likely scenario is for companies affected by the RFS to evaluate available options and pursue an option that offers the greatest financial return over the longest term, even when an upfront investment is required."

In fact, the Center for Agricultural and Rural Development paper points out, renewable identification numbers (RINs) create financial opportunities and alternative compliance opportunities for obligated parties. In 2013, RIN prices went from less than 10 cents per gallon at the beginning of the year, to a high of more than $1.40 in July. At the end of October, RIN prices for traditional grain-based ethanol were at about 25 cents.

The paper argues that higher RFS requirements actually encourage innovation and new infrastructure in the vehicle fuels marketplace, which allows for reduction in the cost of increasing percentages of ethanol in the fuel supply. If more pumps were installed so flex-fuel vehicles currently on the road could better utilize the fuel, fuel producers and blenders would benefit financially thanks to the accumulation and selling of RINs. "A potential marketplace today exists for higher blends of ethanol with 16 million flex vehicles on the road, but these vehicles cannot easily locate pumps with higher blends," Babcock said. "Maintaining high mandates forces industry to consider alternative pathways to compliance. Once such pathway is to locate pumps where fleets of flex fuel vehicles exist and then profit greatly from the higher volume and higher revenue boosted by new RIN sales."

The full paper can be found at the CARD website. CARD is located at Iowa State University.