Brian L. Milne, Energy Editor, Schneider Electric
Lower wholesale costs for gasoline are moving through the supply chain which should again pressure retail prices, with the Energy Information Administration (EIA) last reporting in their weekly survey through March 18 a national average for regular grade at a $3.696 gallon five-week low. The average has declined for three consecutive weeks through mid-March.
Limiting the upside for gasoline prices is reduced demand compared with historical averages. On March 21, the American Petroleum Institute said gasoline deliveries, a proxy for demand, sank 3.1% in February from February 2012 to 8.4 million barrels per day (bpd). It was the lowest implied demand rate for gasoline during a February since 2001. The API also said for the first two months of 2013, gasoline demand is trailing the year prior period by 0.3%, which is also the lowest demand rate since 2001.
While the API shows gasoline demand down earlier this year, the most recent data from the Federal Highway Administration showed Americans drove 1.2 billion or 0.5% more miles in January than they did during the corresponding period in 2012. All regions of the country showed an uptick in miles traveled on U.S. roads.
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The lack of reconciliation between these two data sets reflects improving vehicle mile efficiency for U.S. vehicles. Earlier this month, the Environmental Protection Agency (EPA) said the mileage efficiency rating for cars and trucks sold in 2012 increased 1.4 miles per gallon. The air regulator estimates a 16% increase in U.S. vehicle mileage efficiency from 2007 through 2012.
Vehicle mileage efficiency readings will continue to improve in the U.S. through rigorous standards jointly imposed on automakers by the EPA and the Department of Transportation. The improving mileage collides, however, with a requirement for increasing levels of ethanol in the gasoline pool.
The Energy Independence and Security Act of 2007, passed in a year when many experts conclude U.S. gasoline demand peaked, includes a provision mandating increased amounts of renewable fuel in transportation fuels to displace petroleum-based fuel. The majority of this requirement is being satisfied by corn-based ethanol.
Likely this year, the oil industry believes ethanol will reach a 10% concentration level in the gasoline pool. Since the EPA issued only a partial waiver for non-flex fuel vehicles to use gasoline with a 15% ethanol blend ratio and automakers would void vehicle warranties with ethanol blend ratios above 10% for 2000 and older vehicles, the oil industry said they have hit the “blend wall,” and won’t be able to meet the higher Renewable Fuel Standard (RFS) without buying additional compliance credits known as Renewable Identification Numbers (RIN).
RINs, which are generated when a renewable fuel is either produced or imported into the US, moves with the blendstock through the supply chain, and will eventually be submitted to the EPA to show an obligated party’s—refiners, blenders and importers—compliance with the RFS. RINs can be separated from the renewable fuel and traded in the open market, with the purpose of this trading component aimed at providing obligated parties flexibility in meeting their Renewable Volume Obligation.
Ethanol D6 RINs for 2013 started the year trading at roughly 7 cents, but spiked to $1.10 in March before dropping back to a 70 cents range. A $1 RIN value can add as much as 10 cents to the cost of a gallon of gasoline explain industry analysts, with the cost of complying with the RFS expected to be fed through the supply chain. Meanwhile, oil refineries are seen exporting more gasoline to avoid increasing their RVO since exports are not considered under the RFS. Some have suggested refineries might produce less gasoline to avoid driving up their RVO.
Consider oil refiner Valero Energy projects its costs in complying with the RFS through the RIN program could jump from $250 million last year to $500 to $750 million this year for an idea of how the blend wall is affecting the marketplace; and Valero is also a major producer of ethanol.
The oil industry has requested a freeze in the RFS or its outright dismantling because of the issue in meeting the mandate, and some legislators are looking for ways to protect the consumer from the effect of the surging compliance costs. Absent a response by the EPA and lawmakers, retail gasoline prices could continue to climb this summer even if demand continues to fritter away.
About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at [email protected].