FUBAR

Until now, I have posted on the bulk or spot market dynamics between Big Oil, merchant/independent refiners and non-refining marketers: how Big Oil’s free RINs prevent merchant and independent refiners from fully recovering RIN expenses. Further downstream at the wholesale rack, it gets worse to the detriment of small refiners and mom-and-pop gas stations. A small refiner often bypasses the spot market by blending and selling its production at the refinery truck rack or a nearby distribution terminal. Mom-and-pop gas station owners generally do not buy their supplies in the spot market but, instead, purchase blended or finished gasoline at the distribution rack from a marketer who does. Small refiners generally have no surplus RINs since they usually blend only their own production. Mom-and-pops will have no RINs as they most often do not blend at all.

As a result, small refiners and mom-and-pops have little or no revenue from selling RINs. These two small business entities, however, must compete against Big Oil and non-refining marketing chains when selling at wholesale or retail. Big Oil blends and markets far more gasoline than its refineries produce and, in so doing, obtains a significant volume of RINs beyond its compliance needs. Non-refining marketers are totally exempt from RFS, and, therefore, every RIN they obtain from blending is surplus.

Money from selling surplus RINs allows Big Oil and non-refining marketers to offer blended fuel discounts to stations carrying their brand. Small refiners are trapped. With little or no revenue from selling RINs, they are faced with a Hobson’s choice: either match the unaffordable discounts offered by Big Oil and non-refining marketers or lose customers to them. Likewise, mom-and-pops, not displaying the Big Oil or non-refining marketer’s brand, do not enjoy the discounts given branded stations and, therefore, are also trapped in competing against those branded stations.

In comments to EPA, Cumberland Farms noted,

Similarly, the terms of our supply contracts specifically address how our supplier must pass through value from the RINs that they separate when blending our fuel.

That is, not only are wholesale marketers offering RIN-based discounts, their larger customers are demanding and getting them.

To be sure, RIN revenues are not all windfall profit for the blending marketer. The spot price to acquire blend stock does reflect some of refiners’ RIN expense. The remainder, however, is pure windfall and can finance wholesale rack discounts. The small refiner forced to keep its RINs for compliance sees this as rigged competition. The mom-and-pop retail station not receiving the same discount as its branded competitors sees exactly the same thing.

To the point, none of this unfairness would exist if the RFS obligation were moved to the distribution terminal loading rack. Small refiners would be on an equal footing with Big Oil and non-refining marketers; all would have to retain RINs for compliance on their wholesale volumes before selling any surplus. The spot price of blend stocks would be lower since refineries would have no RIN expense to pass through. Mom-and-pops could worry less about RIN-financed discounts to branded competition since revenues enabling those discounts would largely disappear. Blending marketers might just break even. Eliminating both RIN pass through in spot prices and RIN financed rack discounts should offset the loss of RIN revenues.

There is an old World War II acronym for messing things up: FUBAR. The truest translation cannot be repeated hear, but it accurately describes what EPA, by separating the point of obligation from the most efficient point of compliance, has done to transportation fuel supply markets. Returning the point of obligation to where it belongs will make markets recognizable again.

Bob