Doing the Math, Part 4 or 5

ACE's Grassroots Voice columnist explains the RINs math behind E85, that ought to result in savings at the pump. Lamberty's column appears in the February print edition of Ethanol Producer Magazine.
By Ron Lamberty | January 23, 2017

Within a couple months of starting as market development director at the American Coalition for Ethanol, I got kicked under the table by a couple of fellow ethanol supporters for answering questions about petroleum marketers’ E10 pricing philosophy in a way that made marketers seem … well, rational. I made it sound like station operators sold ethanol-blended gasoline based on what they paid for it, rather than being out to ruin the ethanol industry or please Big Oil overlords.  I made it sound that way because, for the most part, that’s what they did. Sure, there were (and are) retailers out there who just don’t like ethanol in any of its forms (mostly due to a fervent belief in anti-ethanol mythology), but they are the exception, not the rule.

Back then, I was defending retailers who weren’t selling E10 for 5 cents less than regular, even though the tax on ethanol blends was 5 cents less than straight gas.  At the time, ethanol usually cost more than gasoline, and E10 cost 2 to 3 cents more than straight gas. The cost flipped to 2 or 3 cents less than regular unleaded when the blenders’ tax credit was applied, and street prices reflected those differences. So, when an ethanol advocate chewed out a retailer for not sharing the tax credit, I offered that explanation and got kicked.

Over the past couple of years, I’ve been in a similar situation, when people reported retailers who “weren’t selling E85 at the right price.” The assumption by ethanol supporters is that the retailer is overpriced either to make a ridiculously high margin, or to “prove” no one wants to buy flex fuel. Since you’re reading this, and can’t kick me, I’ll tell you that’s hardly ever the case. Almost without exception, I can find out why a location prices flex fuels the way it does by asking one question: “How are you handling your RINs?”

The answer is usually a blank stare, or “The what?” or “My supplier takes care of that RIN stuff,” and that nonanswer answer tells me the issue isn’t the retailer’s E85 selling price, it’s the E85 buying price. In most cases, the retailer’s mark-up on flex fuels is the same as other fuels, but no RIN value is reflected in the wholesale cost of E85 from the supplier. RINs, renewable identification numbers, are used by obligated parties to demonstrate compliance with the renewable fuel standard (RFS).

If a retailer buys E85 “at the rack,” it’s probably actually E70; and, more importantly, the RIN value is rarely reflected in a discounted price for the fuel. Flex fuel rack prices are more competitive in markets where there are multiple suppliers, but in most cases, refiners argue they have to turn in RINs to comply with the RFS, so it makes no sense to give away the value of a RIN when they can’t sell it to recoup that value. That’s why refiner rack prices for “clear” gasoline have an additional 8 to 12 cents per gallon markup—to pay for the RINs they’ll have to buy for that unblended gas. (Refiners that complain about having to buy RINs don’t mention additional margin from clear gasoline, do they?)

If it’s fair for a refiner to markup clear gas (it is), then E70 should be marked down to reflect the extra RINs it creates. A refiner selling a thousand gallons of E70 gets 700 RINs. After giving EPA the RINs it requires for the 300 gallons of gas in the blend (at about 10 percent, that’s almost 30 gallons), the refiner has nearly 670 extra RINs. Using the refiners’ clear gas upcharge “math,” those extra RINs should knock the E70 price down 50 to 80 cents per gallon. At those numbers, I would expect very few calls about high E85 prices. And even fewer kicks.

Author: Ron Lamberty
Senior Vice President
American Coalition for Ethanol