Oil groups warn of biofuel risk to prices

Spectacular moves in an obscure biofuel market threaten to lead to higher US petrol prices and even localised shortages in regions bruised by fuel queues after superstorm Sandy, the oil industry has warned.

Fuel suppliers say they might export more petrol, or reduce US imports, as the surging price of credits certifying compliance with Washington’s renewable fuel mandate raises their cost of selling petroleum products.

US federal law requires refiners and wholesalers to blend increasing amounts of biofuels each year into the petrol they sell. They can also buy credits as a substitute for meeting blending obligations. The credits are generated when biofuels are produced.

The price of these credits, known as Renewable Identification Numbers, has jumped 20-fold to records this year as traders fear that stocks will be exhausted by 2014. Ethanol credits breached $1 last week, up from 5.25 cents on December 31, according to Argus Media. More than 12bn ethanol RINs will be created this year.

RINs have become the latest flash point in debates over the US renewable fuel standard, a mandate amended by Congress in 2007 and expected to require the sale of 13.8bn gallons of corn-based ethanol this year. The Environmental Protection Agency last year denied requests to waive the standard after drought decimated corn crops, the feedstock for most US ethanol.

Ethanol sales have lagged behind mandated blending volumes because overall US petrol demand is weak and oil companies are reluctant to mix more than 10 per cent ethanol into each gallon, capping consumption.

The widening divergence between the mandates and consumption means oil companies are fast depleting their RIN stocks.

Traders say that if the RIN supply runs out they might stop importing petrol. Atlantic coast cities such as Boston and New York depend on inbound shipments from Canada, Europe and the central US.

Patrick Kelly, senior policy adviser to the American Petroleum Institute industry lobby, said: “What the high RIN price does to the industry as a whole is disincentivise imports and additional production and incentivise exporting finished products.”

Valero, the biggest independent US refiner, said: “If RIN prices stay elevated like this, eventually that will be reflected in the price at the pump and people in areas that are short refining capacity will notice it first.”

The biofuels industry argues that any RIN shortfall could be remedied by installing pumps that deliver more ethanol-rich blends.

Geoff Cooper, director of research at the Renewable Fuels Association, said: “To hear some oil companies tell it . . .this ‘blend wall’ is impenetrable. That is not the case. There are legal options available that the right RIN price is going to drive the market towards.”