By Beth Hilbourn and John Auers
Little did she know it, but in 1992, Scottish singer Annie Lennox set the EPA’s course with the renewable fuel standard when she released the song, “Walking on Broken Glass.” The EPA has had to take careful steps balancing the satisfaction of big oil and the corn lobbyists. There continues to be various RFS policy speculation and corresponding RIN price fluctuations. The EPA’s goal seems to be to grow the program as much as possible each year while keeping the prices as stable as possible. They seem to have accomplished that when setting the final 2019 RVO last Friday, November 30, 2018. With an almost continual decline in 2018, what will happen to RIN prices in 2019? How much did small refinery waivers influence RIN prices in 2018? When will E15 be available year round? These questions are perpetual.
“You were the sweetest thing that I ever knew.”
The EPA has better control when keeping the prior year RIN carryover at the middle of the road as was the case in 2014-2016; however, 2014-2016 compliance was also set at the same time or on November 30, 2015. 2017 was the first year on course where the following year RVO was set in the last week of November of the previous year. A major change, such as the change to E15 year round, cannot be done without consideration to the RVO since the RIN price would crater from an abundant supply. These factors and more are considered when setting the annual RVO which was set for 2019 just last Friday, November 30, 2018, and is shown in the table below.
The imputed corn ethanol has remained constant the last few years at 15 billion gallons. The growth has been in biodiesel and renewable diesel since very little of the advanced biofuel obligation has been filled with advanced biofuel, which has been mainly comprised of sugarcane ethanol. After holding essentially constant through 2017 and 2018, the advanced biofuel obligation has increased by over 3%. U.S. biodiesel production has been increasing to make up for the lost Argentina and Indonesia imports.
“Won’t you pick the pieces up?”
RIN price history is shown in Figure 1; and Figure 2 shows the delta between current and prior- year RIN prices. RIN prices have not reached this low since September 2015 when the proposed 2014, 2015 and 2016 RFS triggered RIN prices to fall. The final 2014, 2015, and 2016 RFS mandate brought the RIN prices back up significantly. In 2018, current year minus prior year RIN differentials have increased from 2017; however, since this last October, the ethanol RIN differential has dropped back down to one cent. A differential may indicate that next year’s prices could be an expected increase assuming no overabundance of prior year RINs. A differential also seems to indicate a larger amount of RIN carryover and pushing the current year RINs to a larger value.
“You were the sweetest thing that I ever knew”
Continuing the biodiesel tax credit seems lucrative since it is just an additional credit to the biomass-based diesel RIN. There has been a biodiesel tax credit every year, but most often it has been known in arrears. It is a widely accepted practice for the biodiesel producer and blender to split the prospect of the tax credit. The biodiesel tax credit just seems to be another political avenue that can be used to sway opinion. U.S. biodiesel producers are always like, “Yes have the tax credit but don’t let the renewable diesel folks participate; don’t let importers participate, allow it for exports.” On November 26, 2018, a proposal was released to make technical corrections to the Tax Cuts and Jobs Act (PL 115-97) and to extend the biodiesel and renewable diesel tax incentive. The proposal for a multiyear extension of this incentive would keep the credit at its current rate of $1 per gallon for 2018 through 2021, but gradually reduce it to 33 cents per gallon by 2024 and then allow it to expire.
The biodiesel tax credit was established in 2005 by the American Jobs Creation Act of 2004. The U.S. Congress allowed the biodiesel tax credit to expire at the end of 2009, 2011, 2013, 2016, and 2017, which meant that the credit was not initially in place for 2010, 2012, 2014, 2017 and 2018; however, in each of these years, the tax credit was eventually reinstated retroactively through various pieces of legislation near the end of December each year or in early January of the following year. The biodiesel tax credit has not been reinstated for 2018; but, as usual, there is a high likelihood that Congress will eventually do so.
“But I don’t care for sugar honey if I can’t have you.”
The table below shows estimated and actual renewable fuel RVO’s for each compliance year. When gasoline and diesel production is lower than anticipated and the small refinery waivers are larger than anticipated in the estimated RVO, then in general, the amount of RIN carryover increases. Of course, the actual RVO incorporates all small refinery RVOs while the estimated RVO does not. Twenty percent of the prior year RINs are allowed to be retired in a compliance year. Also affecting RIN carryover is the amount of renewable fuel production which is anticipated to be constant because of the blend wall. A simplified approach to comparing 2017-2019 would be to expect the 590 million gallons of increased 2019 RVO to reduce the RIN carryover down by 2% assuming everything else is constant. In the meantime, the 2018 RIN carryover to 2019 might increase by another 2.6% pushing toward the 20% carryover level. It seems silly to consider reinstating the small refinery RVO since an estimate for it is always factored in along with the RIN carryover and other factors when setting the next year’s RVO.
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (the next edition of which will be issued in early February) and our various other studies. In our Outlook, we have a Regulatory Initiatives section where we explore the impact of Regulations on petroleum product supply and demand. U.S. RFS policy also factors into our Alternative Fuels section of the Outlook. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting us at 214-754-0898 or visiting our website at turnermason.com.