The USSR, Central Planning, Five-Year Plans, Cellulosic Ethanol, And RINs

Updates

October 27, 2014: update on ethanol, ethanol blending, RINs as reported by 24/7 Wall Street:

Another bit of fallout from the diving demand for gasoline is just about to hit the front pages. U.S. ethanol producers are approaching the so-called blend wall, a term that describes a situation where the 10% blend of ethanol with gasoline reaches its mandated limit. At that point, the value of ethanol collapses and producers begin agitating for a higher blending limit.

The four-week rolling average blending rate for ethanol in the United States reached 9.94% in the week ending October 10. The 10% blend rate was surpassed for one week in mid-September.Ethanol blenders, including major independent refiners like Valero Energy Corp. and Tesoro Corp., in general like the low price of ethanol, which dropped below $1.60 a gallon earlier this month, less than half the price of a gallon of ethanol at its peak in August. 

Blenders took a beating in 2013 when corn prices skyrocketed, demand was falling and blenders bought renewable energy credits called RINs, bidding the price up from a few cents to more than $1.00. 

The producers want the federal government to raise the federally mandated blending amounts for 2014. Refiners and blenders oppose raising mandated limits and sent a letter to the U.S. EPA outlining its case for leaving the mandated levels where they are.

November 16, 2013: RINs trading as low as 16 cents/RIN just after 2014 proposal.

US corn-based ethanol RINs traded as low as $0.16/RIN just after 2014 RFS proposal released, down from $0.26/RIN before.

November 13, 2013: [Note: this story is about corn-based ethanol; the original post was about cellulosic ethanol.] The US corn-ethanol mandate is about to take another hit. MSN Money is reporting:

This week, the Environmental Protection Agency is expected to announce changes to the ethanol mandate, a 2007 law that requires energy companies to mix billions of gallons of ethanol into gasoline and diesel fuels.

After six years in the mix, corn-based ethanol has lost its popularity, and a diverse group of critics is calling for the law's repeal.

A proposal for the EPA's changes, leaked in October, would significantly scale back the ethanol-gas blend requirement to 2012 levels.

"If approved, the proposed cut in the biofuel mandate in 2014 to 15.21 billion gallons from 18.15 billion would mark an historic retreat from the ambitious 2007 Renewable Fuel Standard (RFS) law that charted a path toward ever-greater use of clean, home-grown fuel," said Reuters at the time.

But many think such a "historic retreat" would be not nearly enough. An extensive investigation by the Associated Press, published by accident Monday, outlined a variety of ways the mandate is "badly hurting the environment."

Though ethanol fuel releases less carbon dioxide than other kinds of gas, many question if the side effects of production are worth it. "[I]n the president's push to reduce greenhouse gases and curtail global warming, his administration has allowed so-called green energy to do not-so-green things," says the AP.

Original Post

A reader must have remembered that I could never understand RINs.  I think I finally understand them.

This is how I think it works. I sometimes incorrectly use "RIN" where I should be using "REC." The "RIN" is simply the number; the "REC" is the actual piece of paper, the certificate.

I make a gallon of gasoline in my garage using the leftover corn stalks from my garden, so it is "renewable energy."

• I send in the application to the RIN/REC authority requesting a certificate with a RIN on it (a "REC") for my one gallon of gasoline which I certify was made from corn stalks.
• The REC authority issues me a certificate with a unique 38-number code (the RIN) for that gallon of gasoline; I place the unique 38-number code on the metal container holding the gasoline.
• That gallon of gasoline is then worth a) the going price someone will pay for the gallon of gasoline PLUS b) the market value of that piece of paper holding the unique 38-number code.
• According to wiki, refineries are only interested in the certificate: "These certificates can be sold and traded or bartered, and the owner of the REC (the certificate) can claim to have purchased renewable energy."

Don't you just love that "can claim to have purchased renewable energy" bit? If the federal government doesn't require very much renewable energy to be used in any given year, the RECs lose value (could become worthless); but if the federal requirement increases the requirement for renewable energy, the RECs gain value. This is exactly why Mr Dimon of JP Morgan buys these certificates, betting the roulette wheel will be green.

This seems to be very similar to the "Fed" printing money to stimulate the economy. But I digress.

Regardless of whether I have the details correct, in my mind I now understand RINs and RECs. The key to understanding how this scheme works is that the owner of the REC "can claim to have purchased renewable energy."

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I remember tenth grade social studies. It was the first time I read about "central planning" and "five-year plans" while studying the USSR. [For newbies: that was a "country" prior to the Reagan presidency.]

Years ago I wrote a paper for some class suggesting that the USSR/Russia would eventually become more capitalistic, looking more and more like the US of the 1950s; while simultaneously, the US would eventually become more and more like the USSR of old, with "central planning" and "five-year plans.

With the EPA and ObamaCare it seems my thesis wasn't too far off.

I was reminded of that by this story sent to me by a reader: cellulosic ethanol off to a delayed, boisterous start, as reported in The Washington Post.

Central Planning & Five-Year Plans: US Cellulosic Ethanol As A Case Study

First, the "central planning" part:

The Energy Independence and Security Act passed by Congress in 2007 with rare bipartisan support. The law provided a road map for increasing the use of renewable agricultural byproducts in the U.S. motor fuel supply.

Now, the "five-year-plan" part: the EPA's initial quota (back in 2007) was one billion gallons, with annual increases.

Penalty: the EPA would impose penalties on refiners who would not contribute their fair share of cellulosic ethanol to their finished products.

Reality: even if the refiners wanted to comply, they couldn't. There was "no" cellulosic industry in the US.

Some Statistics

One billion gallons sounds like a lot. Refiners were up in arms. They said the US industry could not supply a billion gallons.

How much gasoline is consumed each year in the US? About 150 billion gallons-- US EIA.

In percent, how "much is" one billion gallons out of 150 billion gallons? 1/150 = less than a percent (about 0.6 percent actually).

Where Are "We" Now With Regard To Cellulosic Ethanol?

The EPA dialed back the original quota from one billion gallons to "a paltry" 14 million gallons earlier this year, and now has been forced to dial back again, this time to only 6 million gallons.

Six million gallons represents 0.004 percent of the amount of gasoline consumed annually in this country.

Heritage has a great graphic showing the original quota, the revised quota, and the actual production. 

But "cellulosic ethanol" factories are now coming on-line and although they won't contribute much to the US energy supply, a lot of folks could make a lot of money if the EPA increases the quotas over time. See the Washington Post article linked above.

So, I am brought up to speed on where we stand with cellulosic ethanol.

Seriously, for those interested, the linked article is excellent.