about the Transportation Fuel Supply System and Markets.

Understanding the gasoline and diesel supply system along with a bit of the RFS helps explain how the point of obligation has distorted, even corrupted, the transportation fuel supply system in favor of Big Oil and large marketing chains while harming biofuel producers, farmers, merchant and small refiners and mom-and-pop small retailers.

This post is a simplified explanation of that environment adequate to this purpose. This flow diagram may (or not) help understand the fuel, RIN and money flows involved. Do not be dismayed by its seeming complexity. I will refer to this diagram often in subsequent posts.

The Supply System.

Some may assume a Big Oil retail station sells gasoline and diesel from the same corporation’s refineries. This industry model, however, is hardly, if ever, true. Transportation fuel sales take place on three levels: bulk, wholesale and retail. Generally, in bulk fuels transactions, refineries sell production in mega-volume transactions to marketers not necessarily owned by the same company. Bulk fuel transactions usually occur “above the rack” when fuel is still in pipelines or terminal tanks. Marketers buy fungible bulk fuel, blend it at a pipeline or other terminal with biofuels such as ethanol and biodiesel, and resell it at the wholesale level. Wholesale transactions occur “at the rack” where tanker trucks are loaded to deliver blended fuel to retail stations. Big Oil and chain marketers provide wholesale fuel to their branded stations and, in addition, sell wholesale fuel to independent third party retail operations such as small mom-and-pop stations. A smaller but significant volume of motor fuel bypasses the bulk fuel market when refiners, often small refiners, sell, blend and wholesale their product at refinery or nearby racks.

Biofuels and RFS.

The Renewable Fuel Standard statute and rules specify the gallons of biofuel required by law to be blended into the gasoline and diesel you and I purchase. Under EPA’s point of obligation rule, the legally enforceable duty to achieve those gallons belongs to refiners. Each refiner’s blending obligation is defined by the refiner’s production volume and by national percentage standards issued annually by EPA. The refiner’s production volume is multiplied times the national percentage standard to calculate the refiner’s renewable volume obligation, or RVO, in gallons of biofuel.

A refiner proves compliance with this law by retiring Renewable Identification Numbers or RINs with EPA. RINs are the redeemable box tops of the transportation fuel industry. RINs, created only by biofuel producers, remain attached to each gallon of biofuel much like a serial number until separated by blending the biofuel into the product you and I use. Anyone who blends can separate RINs from biofuel. In fact, likely a vast majority of blending is done by marketers with no compliance obligation for the fuel they market at the wholesale rack. Refiners not achieving their RVOs through blending must purchase RINs to cover the shortfall. To fulfill this demand, marketers can sell RINs from every blended biofuel gallon. Congress and EPA intended each obligated party’s compliance would be at the lowest possible cost: either construct one’s own blending infrastructure or purchase RINs from someone who did. Unfortunately, as we shall see, the program has gone tragically awry, and this intent has not been fulfilled, the result being significant collateral damage.

8 Take-Aways

Additional facts and concepts helpful in understanding why the point of obligation is wrong and illegal, are:

1. Usually, Big Oil refiners produce, sell and are obligated on much less bulk fuel than Big Oil marketers purchase, blend and resell at wholesale. In other words, many, if not most, vertically integrated Big Oil enterprises are serious net purchasers of bulk fuel. This fact drives the entire point of obligation controversy. Once this net buyer status is grasped, almost every conclusion I reach in this blog logically follows.
2. Chain marketers, not owned by Big Oil and not obligated for RFS compliance, also purchase, blend and resell at wholesale bulk fuel supplies not marketed by Big Oil.
3. Bulk fuel not produced by Big Oil refiners is produced by merchant refiners whose business model is simply to purchase crude oil and sell bulk fuel to marketers. Big Oil refiners also sell in the bulk fuel market and follow, when viewed solely as refiners, the merchant refiner business model. True merchants, however, have insignificant marketing operations such as those associated with chain and Big Oil marketers. Chain and Big Oil marketers could not operate their wholesale businesses without the bulk fuel supplied by merchant refiners.
4. All marketers compete head-to-head in the wholesale market as do those refiners, such as small refiners, who bypass the bulk market by wholesaling blended fuel directly at their refinery and nearby racks.
5. The U.S. Gulf Coast, having excess refining capacity, is one of the largest gasoline exporters in the world. This oversupply means domestic bulk fuel prices are driven by the lowest cost suppliers both in the Gulf Coast and in regions such as the mid-continent tied to or competing with the Gulf Coast. Notably, New England, including New York Harbor, is a net importer of gasoline, and prices there are affected largely by the price of imports filling the supply gap.
6. All refiners, including Big Oil refiners, generally purchase RINs to meet part or all of their compliance obligation.
7. All marketers, including Big Oil marketers, generally sell separated RINs to those refiners via the RIN market.
8. Refiners, therefore, are RIN buyers, and marketers are RIN sellers.

I will tie these take-aways together in subsequent posts to demonstrate my position on the RFS point of obligation.