The Broken RFS and RINs Fraud

As the former senior federal law enforcement officer who initiated and oversaw a nationwide effort aimed at investigating significant fraud in this program, I believe the existing regulatory and oversight framework will continue to provide opportunities for illegal exploitation and lead to competitive distortions in this sector. Additionally, maintaining the regulatory status quo in this program will deprive the American public of the full energy, consumer, and environmental benefits the founding statutes sought to provide while continuing to expose U.S. taxpayers to ongoing fraud.” – Doug Parker, former director of the Environmental Protection Agency’s criminal investigation division, aptly pointed out in a Sept. 4, 2016, white paper addressing fraud in the Renewable Fuel Standard (RFS) program.

As Mr. Parker indicates in his whitepaper, the RFS is broken and open to massive speculation and fraud. How so? Let’s break it down.

Although the EPA has designated refiners and importers as the parties responsible for complying with the RFS, most have no control over the blending of renewable fuels into the gasoline and diesel they produce. The majority of these “obligated parties” are merchant refiners and small refiners.

These obligated refiners are forced to buy Renewable Identification Numbers (RINs) – which are generated when renewable fuel is blended with transportation fuel and needed to prove compliance with the RFS – from competitively advantaged, Big Oil and Big Retail, as well as exempt blenders and market speculators, in a highly unregulated market.

Companies that generate RINs can sell them to refiners, importers, hedge funds, Wall Street banks and others, and they can charge ANY AMOUNT. Even worse, RINs can be hoarded, leading to a severe distortion of the market.

As a result, the majority of obligated refiners are held captive by the RIN market, whose dealers could care less about the harmful impacts of their egregious prices. After all, the sky’s the limit on profits under these circumstances.

It’s also very troubling that three of the four largest beneficiaries of the cornered RIN market are foreign-owned companies. Take a closer look at who these companies are here.

This uneven playing field clearly leaves the door wide open for market manipulation, speculation and fraud. Carl Icahn, chairman of Icahn Enterprises, recently described this manipulation in a letter to the EPA: 

RINs now are selling at over 20x what it would cost the refinery to produce them.  Even worse, speculators and large investment banks now are competing with refineries to purchase RINs from the blenders, and we believe they are making secret deals with the blenders to entice them not to sell to the refineries but rather to sell to them. These speculators are “hoarding” the RINs hoping to get much higher prices as the time nears when refineries are obligated to deliver RINs to the EPA. This is a classic short squeeze of a “rigged” market which is now entering its most dangerous phase – “HOARDING.”  As RINs are “hoarded” their price will move up exponentially and bankruptcies will take place which causes a debilitating domino effect.

Even with ample evidence to the contrary, the EPA claims that the RINs cost is in the crack spread. You have got to be joking. RIN prices move up and down independent of the crack spread. Take a look at the actual data here.

All you need to do is take a closer look at the price of a RIN to see the evidence. The market price for a RIN doesn’t reflect its true value.

In 2007, when the EPA first created the RIN system for compliance with the RFS, RINs originally sold for a few cents. However, as the unregulated RIN trading market emerged, the price skyrocketed for the credits, reaching more than $1.50 in 2013.

There should have been enough RINs in the market at the time, so why the hike in the price? Crooks took advantage of an unregulated, opaque market. As a result, the U.S. Department of Justice found widespread fraud as RIN prices artificially escalated (you can read more about that here).

The same is true in 2016. As Mr. Parker points out, “From 2010 to the present, with moderate overall increases in renewable fuels integration, the RINs market has increased from less than $1 billion to in the range of $15 billion today – creating an exceptional new market opportunity for those seeking illegal profits.”

If any market is adequately supplied, the price of the product should be marginally greater than the cost to produce it. RIN prices for the third quarter of 2016 were, on average, more than 40 times higher than 2007 prices, but the cost of blending did not substantially increase. THIS IS WRONG AND IT MUST BE STOPPED.

The EPA has the ability to fix the RFS.

The broken RFS and unregulated RIN market creates a system of winners and losers (click here to learn more about who wins and who loses), and it is causing significant harm to merchant refiners and small refiners, who produce roughly half the nation’s gasoline and diesel.

Unless the EPA fixes the RFS, the future of these refining companies – which employ thousands of Americans across the U.S. – is uncertain. One thing is for sure, though: If these refiners go out of business, Americans will see much higher gas prices at the pump.

The EPA should do what the law already tells it to do: make ALL blenders responsible for compliance. By doing this, blenders would have both a legal obligation and a financial incentive to increase the use of renewable fuel – the same as refiners and importers – and the RFS will have a better chance of working as intended. This would benefit consumers, as well as the many companies involved in the program. Read more about this easy solution here.

Tell your legislators that the EPA must fix the RFS NOW.