Why US Refiners Like Shipping Gasoline To Mexico -- RINS -- November 8, 2017

Folks wonder why the price of gasoline will melt up when there remains a huge glut of oil in the US. There are many, many reasons. One reason: state taxes. Californians know all about that as new gasoline and diesel taxes go into effect in that state today.

But here's another reason: RINS.

See this article over at Bloomberg, which I posted in an earlier post but for a different reason. But this part of the story was too important to be lost buried in another post, so here it is, as a stand-alone.

US refiners will preferably ship their product to Mexico where they will command better margins because Mexico does not have costly biofuels regulations. Shipping product to Mexico will sop up some of that excess, in turn pushing prices here in the US slightly higher (and, of course, if Mexico can't take it all, Europe certainly will):

The chance to skip out on compliance with costly U.S. biofuels regulations by exporting fuel is a huge incentive for overseas sales. Under the Renewable Fuel Standard, refiners aren’t required to buy blending credits called RINs for barrels that are exported. Mexico has potential to demand 600,000 barrels a day of gasoline imports as its own refineries limp.

America’s southern neighbor has continued to be its best customer as its own fuel factories suffer from inefficiencies and breakdowns -- in September Mexico’s crude processing fell to the lowest since December 1990, or about 33 percent of its total national operating capacity.

I don't have a dog in this fight:

• I don't invest in refineries, as a general rule (only exception: I own shares in some publicly-traded integrated companies)
• the price of gasoline is off-set by the few miles I actually drive any more, and it's getting less every year (I do replace the tires on my bicycle more often these days, however

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From A Reader

Some time ago, I mentioned to a reader that a family member suggested to me the high price of gasoline in California is due to some sort of "collusion" on the part of Big Oil.

The reader responded with two long notes regarding the gasoline taxes and the price of gasoline in California. I hate "not using" a great note from a reader but I did not know where to use those two notes until now. I'm too tired to do much more than post them as I got them with minimal editing, but it helps me put things in perspective:

The first note from the reader:

Here are current California state fuel taxes (they're going to go up soon)

38.13 cents per gallon of gas

40.01 cents per gallon of diesel

plus

Gasoline subject to 2.25% sales tax. Diesel subject to 9.25% sales tax.

plus the federal government charges 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel

........................ So, the government skims the first 58 cents per gallon of gas or the first 71 cents per gallon of diesel sold in the state of California. I don't know how the "tax on tax" is computed, so those numbers are not warranted correct, but I know it's quite a nice annuity.

......................... The government take is nearly pure profit. They hire a few inspectors and quite a few more accountants, but they have very little overhead. The oil companies have a huge capital expense in exploration and production, not to mention transportation, etc., and their profit per gallon is somewhere around 7 cents per gallon. (Can't find that reference, but it's a number I saw a while back and I was just floored that the risk takers were making only what I considered one tenth as much profit as the government was.)

The second note:

This is an excerpt from an article which ran in Forbes back in 2011. I imagine there are more current figures, but I doubt that the teeter-totter has become more balanced. I'm sure I saw the 7 cents figure within the last couple months, because I would have not remembered it for 6 years. The government figure quoted is an average, and of course, California is at the top of the curve for taxes.

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Industry profit margins are cyclical too. But on average, between 2006 and 2010, the largest oil companies averaged a profit margin of around 6.5%. This pales in comparison to profit margins in just about every other industry. The pharmaceutical industry, for example, routinely averages a profit margin of about 16%. The soft drink market is even more lucrative.

At the gas tank, integrated oil companies make about 7 cents per gallon. Meanwhile, the government extracts more than 48 cents, on average, per gallon. That’s right: Uncle Sam takes nearly seven times more out of drivers’ wallets via taxation than “Big Oil.”

For working Americans higher gas prices do indeed mean higher costs of daily living. But strong oil industry earnings (and profits beat losses in just about anyone’s book) also lead to very real economic benefits for these exact same families.

Compared with a small fraction of oil stocks (about 1.5%) owned by corporate management, the vast majority of such investments are held by average Americans, primarily via retirement accounts. Independent research shows that 14% of industry shares are in IRAs and a full 30% held in mutual funds.

Another 27% of oil stocks are in public pension funds. And in these accounts, oil shares more than pull their weight. While oil stocks made up less than 4% of major pensions in four key states between 2005 and 2008, they accounted for 8.6% of returns.

As the revenues of oil companies improve, so do their stock prices. In turn, teachers, firefighters, policemen and millions of other public servants see their retirement accounts expand. And as most states are struggling to keep their pension programs solvent, oil stocks can help ease that pressure and stave off fiscal woes.

And the economic ripple effects don’t stop there. Oil and natural gas companies support more than 9.2 million U.S. jobs and have invested nearly $2 trillion in domestic capital projects over the last decade. Higher earnings mean more cash to plow into new projects and jobs.

And remember: freely choosing consumers -- not government mandates – are driving industry margins and growth. Unfortunately the bloated political rhetoric generated by Capitol Hill raises the prospect of bad public policy. Some legislators have threatened to institute a brand new “windfall profit” tax in times of unusually high returns.

Such a move would saddle firms with new costs, which will get recouped with higher prices at the pump. Vulnerable American families would be squeezed. And firms would have less money to invest in new projects, leading to slower job growth and fewer employment opportunities.

Denunciations of America’s oil and natural gas industry ignore the fact that shifts in global supply and demand are behind increased prices of recent months. Resisting punitive politics will ensure that petroleum prices drop as political tensions ease and the dollar strengthens. Such market-based policy will also promote jobs, investment and income for America at a time when they are most needed.

-- Robert L. Bradley Jr. is the CEO and founder of the Institute for Energy Research.

Theme Song, The Adventures of Rin Tin Tin