Hello, Hard Data Calling: 2013 RIN prices did not drive up gasoline prices
Remember the summer of 2013? The barbecues, the days at the beach, summer loves, school vacation.
Er…and RINsanity, rising gas prices, and everyone in the oil lobby yelling “broken, broken, broken” while attempting blunt force trauma on the Renewable Fuel Standard.
But was there actually any causal relationship between those rising RIN prices and gas prices? The experts at Informa roll out that hard data. In today’s Digest, we take you through the story.
It seems like only yesterday. Hot nights, summer in the city…and RIN and gasoline prices began to rise.
Spiking RIN prices that went over $1.50 by mid-summer.. Rising gas prices. Apoplexy at the Office of Management and Budget as voices began to whisper that RIN prices were driving gas prices through the roof.
Market participants began to realize in early 2013 that ethanol usage could fall well short of the level needed to meet RFS2, and prices of conventional ethanol RINs rose to levels that were multiples of any that had been experienced previously, spiking to nearly $1.50 during the summer. This was in part a result of the 2012 drought, which reduced the size of the corn crop and led to record-high prices and the idling of ethanol plants in late 2012 and early 2013, as market prices for ethanol were not sufficient to allow producers to offset higher production costs and sustain significantly positive margins.
The retail price of gasoline in the U.S. also increased during the late winter and early spring of 2013. Although this is consistent with seasonal patterns that have historically been experienced in advance of the summertime “driving season” – and gasoline prices actually declined somewhat during the late spring and then remained within a relatively well-defined range over the summer – the coincidental timing led some commentators to speculate that RIN prices might be driving retail gasoline prices higher.
Pain at the pump
You see, pain at the pump is, along with Social Security, a third rail in American politics. Right up there with failing to get snow off the street in Chicago, or garbage picked up in any city.
Hence, panic in DC.
But now, time has passed, gas and RIN prices have both calmed down. Now is the time to ask, was there a causal relationship. Do RIN prices cause gas prices to go bananas.
Which is another way of saying, do RIN prices lead to layoffs in the Oval Office?
Enter Informa
“Some in the Administration,” reflected RFA chief Bob Dinneen, “saw the price in price of credits and rise in price in gasoline, saw a correlation and drew conclusions from that. I testified a number of times on the Hill that there wasn’t a causal relationship. But it’s one thing for a trade association to say it. It’s another to have strong empirical data.”
To provide some data, the Renewable Fuels Association commissioned Informa Economics, Inc. to conduct an analysis.
As Informa Senior VP Scott Richmond explains, “In a nutshell, we set out to look at allegations that RIN prices contributed to gas price run-up in 2013. Now that gas prices have comes back down and 2013 is in rear-view mirror, we are taking a look to see on a statistical basis what actually happened with gasoline prices.”
Informa pulled the weekly average RIN prices reported by OPIS for the period spanning from October 29, 2010, to November 22, 2013, and paired them with weekly average retail gasoline prices reported by EIA for the same time period. Then, they used a statistical method to determine whether changes in RIN prices were a significant driver of changes in retail gasoline prices. Specifically, a Granger causality analysis.
A Granger what?
A Granger is a common statistical method to determine, in the case of two events — especially if there is some correlation in the data, whether one “caused” the other.
To test this, an initial model was developed that specified the current change in gasoline price as a function of the previous week’s change in the price of gasoline. Next, a secondary model was constructed identical to the first, except that the previous week’s change in the RIN value was added as an explanatory variable.
The idea behind the Granger causality analysis is simple: If the second model (containing the lagged RIN variable) is superior to the initial model, then this means that the previous week’s RIN price has some explanatory power relative to the current week’s gasoline price. If this is found to be the case, then it can be asserted that gasoline price changes are “caused” by changes in the RIN price.
We’ll skip further explanations of sausage-making and get right to the meat.
“RIN prices do not appear to cause changes in gasoline prices.”
Which is to say, a model built around RIN prices not causing gas prices to rise correlates better to the real-world results than a model based on RIN prices causing prices to rise.
Why does this matter?
As we mentioned above, politicians fear rising gas prices like you fear the plague. If rising RIN prices turn out to cause rising gas prices, RIN prices have to be capped, by capping the market for renewable fuels at a level that is in balance with existing fuel infrastructure.
“Its all about the signal,” explained Dinneen. “If RIN prices are rising, that’s a signal is that you have a growing marketplace opportunity. There’s a place for that product to go. Absent that signal, there’s a cap on growth. There’s no reason to build capacity, regardless of what you build. Just at the point where cellulosic ethanol is coming online. Rising RIN prices provides the incentive and signal to investment community that there is growing demand, and creates demand to invest. Rising RIN price are a sign that the program is working.
RFS is never intended to be constrained to what is convenient for Exxon Mobil, god bless ’em.”
So, if not RIN prices, what happened to cause gas prices to rise?
As Informa explains: “The primary driver of retail gasoline prices is crude oil prices, as crude oil is the primary input in gasoline production. However, this relationship began to show signs of weakening starting in the spring of 2012. One of the key factors behind this weakening has been the divergence between international and domestic crude oil prices and the heightened volatility of the spread between these prices.
“This divergence was mainly attributable to growing crude oil stocks at inland locations – especially the delivery point for NYMEX crude oil futures at Cushing, Oklahoma – as a result of a combination of increased domestic oil production from shale plays such as North Dakota’s Bakken formation and lagging infrastructure build-out to move the oil to consumption centers.
“The weakening price relationship between crude oil and retail gasoline price followed the growing spread between U.S. West Texas Intermediate (WTI) and Brent crude oil prices. It is also notable that this weakening price relationship preceded the increase in RIN prices.
“Another factor effecting retail gasoline prices is seasonal demand. There is a distinct seasonal pattern to gasoline prices and crack spreads (i.e., the margins refiners earn by processing crude oil into transportation fuels, in this case gasoline). Gasoline prices and crack spreads tend to strengthen considerably through the first quarter of the year and remain strong through the summertime driving season.
“[In summation], The majority of gasoline price movements can be explained by crude oil prices. A $0.10/gallon increase in crude oil prices ($4.20/barrel) has resulted in a roughly $0.10/gallon increase in retail gasoline prices, all else being held equal. In the model, variables for the Brent-WTI crude oil price spread and vehicle miles driven were also statistically significant, and they improved model performance somewhat. Together these variables explain 95% of the historical retail gasoline price movements. This model was also run with conventional ethanol RIN prices included, but RIN prices were not found to be statistically significant>
The Bottom Line
Although retail gasoline prices and RIN prices both increased in early 2013 and remained elevated (though volatile) during the middle of the year, this was mainly coincidental, and upon closer examination it can be determined that these changes generally occurred for different reasons. In fact, the increase in gasoline price early in the year actually pre-dated the increase in RIN prices. Based on statistical analysis, it can be concluded that changes in RIN prices did not “cause” the changes in retail gasoline prices in 2013.
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