Rin Tin Tin, RINs and the price of ethanol

Is the son or daughter of Rin Tin Tin alive and well? For a while I thought he or she was, while catching up on my reading over the weekend. I kept reading articles about RINs (Renewable Identification Numbers), their possible impact on the ethanol market and relatively high ethanol prices, despite the apparent weakening of the ethanol market. There seemed to be RINs and more RINs on every page I turned! Because I hadn’t slept for two nights, I couldn’t really focus on the contents of the articles, but only on the dog Rin Tin Tin and his offspring. How many of you have done that? Come on, be honest. Don’t make me feel bad!

I felt guilty after it became obvious that my focus on Rin Tin Tin resulted from a tired brain and eyes. I am back to the complex world of RINs today. (I had a bit of sleep).

Okay, you ask, “What the hell are RINs?” They are sort of a pass at reflecting company fulfillment of government mandates concerning biofuels. For this article, think ethanol! They are issued at the point of ethanol production or the purchase of the fuel by companies. They are approved by the EPA. They reflect a credit that verifies that the required amount of ethanol has actually been blended into gasoline. Succinctly, the Renewable Fuel Legislation, now the law of the land, mandates that a Renewable Identification Number (RIN) must be attached to every produced or imported gallon of renewable fuel in the U.S. One more thing, RINs are separated from the batch of renewable fuel when it is blended with gasoline. This fact indicates compliance with the law and Renewable Volume Obligations (RVOs). Credits, at this juncture, can be used for trading purposes.

In 2012, before the EPA’s Nov. 2013 proposal to change RIN quotas and lower requirements for ethanol, the price of RINs was very volatile. Initially, they ranged around 1 to 10 cents a gallon. By spring of 2013, however, they were around $1.

Why the price increase and what does it bode for the price of ethanol in the future? Initially, the RINs were thought of as a way to encourage refiners to produce renewable fuels, like ethanol, and to “pay” for credits if they don’t “play” by  meeting fuel targets.

Part of the volatility and increase in costs of RINs, probably, has to do with speculation by banks and other financial institutions. Thomas D. O’Malley, chairman of PBF Energy, indicated in a recent New York Times article that financial institutions “helped transform an environmental program into a profit machine…These things were designed to monitor the inclusion of ethanol in the gasoline pool…They weren’t designed to become a speculative item. For the life of me, I can’t see the justification for it.” Interviews with members of the financial community, conducted by the New York Times, seem to suggest agreement with O’Malley.

According to the Times, speculation in RINs “could have consequences for consumers. In the end, energy analysts say, the outcome will be felt at the gas pumps — as the higher cost of the ethanol credits get tacked onto the price of a gallon of gasoline.” The Times reports that the “credits, which cost 7 cents each in January [2013], peaked at $1.43 in July, and [were] trading for 60 cents” in September. Jordan Godwin in the Barrel Blog indicated that like RINs in 2013, ethanol prices in 2014 are downright wacky. “In a matter of less than two months, ethanol prices went from six-month lows to eight-year highs.” Godwin and others blame delayed returning train cars during the winter and constraints on supply and production. I would add speculation by Wall Street and uncertainty as to the impact and longevity of EPA’s new regulations concerning the reduced mandates for ethanol and other biofuels. It’s a dilemma for proponents of alternative fuels. Less speculation regarding trading, sustained predictable production and refinement of the distribution system, (along with avoidance by some retailers and blenders to price ethanol well over costs) would facilitate more competition with gasoline at the pump. More predictable competition and larger sales at the pump of E15 and E85 would generate more private-sector fixes to the ethanol supply chain as well as likely stabilize prices and, over time, lower them. In light of ethanol’s benefits to the nation, wise folks might be asked to find policies and stimulate market behavior that permit the American people to have it both ways.

The New York Times and Natural Gas- Is it the Moment?

The venerable Gray Lady, the NY Times, has in the recent past treated the possible use of natural gas and its derivatives (methanol and ethanol) as transportation fuels warily. Their primary focus has seemed to be on the environmental problems and economic opportunities related to fracking and the increased production of natural gas. Rarely did the Times cover or note in its editorials the increasing acceptance of natural gas, methanol and ethanol as a fuel to power vehicles. The importance of alternative fuels as part of national energy and environmental policies has not been granted significant visibility in the Times. The Times is still my favorite read over a cup of coffee.

But, surprise! Borrowing and taking liberty to amend the lyrics from the musical Jekyll and Hyde,   “this may almost be the moment…when The New York Times begins to send many of its doubts and demons concerning alternative transportation fuels on their way… this could be the beginning. The momentum and the moment may be coming together soon in rhyme.”

Paul Stenquist, a respected, frequent writer for the Times automobile section, wrote an Oct. 29 article titled, Natural Gas Waits for its Moment. The content of the piece was, in reality, not as ambiguous or speculative. Read it!  According to Stenquist, natural gas has arrived and this is its moment, or at least its soon-to-be moment. Sure there are problems to overcome, but to Stenquist, they seem relatively puny given where he thinks we are, and where he suggests we can be soon.

Stenquist opens his upbeat piece by indicating that “cars and trucks powered by natural gas make up a significant portion of the vehicle fleet in many parts of the world (Iran, Argentina, Italy, Brazil, and Germany).”  After noting the almost 2,000 natural gas stations in Argentina, he asks, “Is America next?”

Based on Department of Energy (DOE) information, Steinquist indicates that natural gas is about $1.50 cheaper than gasoline and diesel fuels for the same mileage, and that because natural gas burns clean, it requires less oil changes, and vehicle exhaust systems last longer.

Sure, the author notes that the initial cost of natural gas vehicles are significantly higher now than gasoline vehicles. But based on an apparent positive interview with a fleet manager from Ford, he indicates that increased sales or leasing volume could bring the vehicle price comparable to today’s conventional vehicles. The key issue Stenquist does not address, is when this will happen, and how long will it take?  But still he and his Ford colleague seem optimistic– perhaps a bit too optimistic, unless Detroit pulls a Steve Jobs; that is, just as Jobs did with the  iPhone, convince the public through marketing and technological innovation that cheaper cleaner natural gas vehicles are a “must” for consumers.

But wait, there’s more!  Stenquist, quoting from the Energy Department’s website, suggests that the environmental benefits of natural gas as a fuel appear to be immediate and important. Succinctly, natural gas vehicles have a much smaller carbon footprint than gasoline or diesel.

What remains, then, for the nation to benefit in a major way from use of natural gas as an alternative fuel?  Well for one, reducing carbon leakage during natural gas production and distribution. Progress is being made. Stopping or cutting back leakage has become a priority for both involved companies, and federal as well as state regulatory authorities.

Second, both car companies and the government acknowledge that using compressed natural gas in a conventional engine would result in degrading engine performance. However, retrofitting engines to use natural gas would increase the octane advantage of natural gas and lessen the density advantage of gasoline-reducing performance issues. Fully designed natural gas cars are still relatively rare and are, at this moment, significantly more costly than conventional cars. But with increased demand, as noted earlier, the costs would likely come down and make household purchase decisions easier. Interestingly, Governor Hickenlooper of Colorado(D) and Governor Fallin of Oklahoma(R) have put together a 22 state coalition. The group has committed to purchasing new natural gas cars to replace old cars in their respective fleets. Detroit has committed in turn to work on developing a less expensive natural gas car, given the market pool or demand created by the states. This effort deserves watching and will, if successful, hopefully, provide a path to cheaper natural gas vehicles for consumers.

Stenquist, correctly, points to the lack of natural gas fuel stations as a key obstacle to increased popularity of natural gas. But he is optimistic that technology now in place (or soon to be in place) will be able to link available natural gas pipelines to in home fuel machines. I, also, would hope that these fuel stations would be placed in parking garages and that they would be much cheaper than currently existing home refueling equipment.

I suspect that the natural gas movement will require more than a few moments; that is, it may take a bit longer to gain traction than implicit in Stenquist’s piece. But it’s nice to see a journalist link natural gas to transportation fuel in such an aggressive way as Stenquist. Now if the Times could only follow in the content of its editorial and op-ed pages.

It is hard to be critical of Stenquist’s piece since it’s almost a first for the NY Times. However, I am puzzled by the absence of any discussion of natural gas based ethanol and methanol as alternative fuels in his article. Both, likely, would be cheaper per gallon and per miles traveled than gasoline. Both would record more environmental benefits than gasoline, and both, if they are accepted in the market, would reduce dependency on imported oil. Perhaps most significantly, both, assuming appropriate government approvals, could be used almost immediately to fuel existing vehicles with relatively simple and cheap engine conversion kits. Think of it!  If we could add the trifecta: natural gas, ethanol and methanol –to fuel stations throughout America, it would provide needed competition to gasoline. Consumers would benefit by having access to lower cost fuel. The nation would benefit from improved environmental and Greenhouse Gas (GHG) conditions. America’s security and economy would be enhanced significantly. It would be a major win for the public interest and for America and Americans.