The Trump Administration is scrambling to develop a regulatory response to rein in high RINS prices that were one of the major causes for the bankruptcy of the Philadelphia Energy Solutions (PES) refinery in January.
EPA Administrator Scott Pruitt and Agriculture Secretary Sonny Perdue have been developing a list of policy options for the White House meeting Tuesday. We are told that the main objective is to lower RINS prices while preserving the Renewable Fuel Standard program.
Among the leading policy options is allowing the federal government to directly sell heavily discounted RINS credits to merchant refiners and create more transparency on the RINS market. In exchange, EPA is also offering ethanol groups a regulatory change to allow E15 sales during the summer months – something that is now banned under clean air regulations.
All of the regulatory options can be implemented through administrative or regulatory proceedings and so the White House can take action without needing any legislation from Congress. An announcement that the Administration is taking any action would alone probably send RINS prices lower.
Since late last year, the Administration has been hoping that Senators representing ethanol and oil interests could develop a compromise that could be implemented but that effort has gone nowhere as ethanol groups have refused to give any ground.
The major catalyst has been the PES bankruptcy that has spooked the Administration and made them vulnerable to a key constituency of blue-collar steel union workers in Pennsylvania where Trump won in 2016.
To emphasize the point, conservative Republican Senator Ted Cruz spoke to 1200 cheering steel union workers under a tent in Philadelphia as the Texas Senator outlined the urgent need for the Administration to act on RINS prices.
Shortly after his election, Trump promised action on the RINS issue early in his administration but progress became stalled after Carl Icahn’s ham-handed approach that led to Icahn’s resignation from the volunteer regulatory czar position. The subsequent year of no action has now led to a refinery bankruptcy that was predicted to happen causing an urgent political and policy problem for the White House.
The major obstacle to any progress has been the opposition from Senators Chuck Grassley (R-Iowa) and Joni Ernst (R-Iowa) as well as a few other farm-state senators. Trump also won Iowa in the 2016 election and had pledged his support for ethanol and other renewable fuels during the campaign.
As a result, Trump has taken a pro-ethanol policy approach during his first year in office. He directed EPA to abandon various policy proposals that would have changed the RFS program and also caused the Trump EPA’s first RFS final rule that mirrored Obama’s robust RFS final rule in 2016.
The administration is now trying the thread the needle between two important political constituencies in Pennsylvania and Iowa. If the decision were left to EPA Administrator Pruitt, EPA would have already issued regulatory changes to the RFS program that likely would have lowered RINS prices.
The big question is whether Trump will approve the regulatory changes over Grassley’s objections. Grassley, who was an early Trump supporter in the 2016 campaign, also holds a key position as Chairman of the Senate Judiciary Committee and has largely been supportive of Trump with respect to the Russia investigation.
To date, Trump has sided with Grassley on all questions on the RFS but we think the PES refinery bankruptcy has changed that calculus with a new political cost to being “all-in” on ethanol. In addition, Cruz and other oil state Senators are taking a page from Grassley’s playbook by blocking a key agriculture nominee as well as any action on a farm bill until the RINS issue gets addressed.
The combination of the PES bankruptcy and holding up the farm bill gives new momentum to the effort to change RINS policy, and we are bullish on prospects for administrative action. We put odds for success at 55 percent that Trump makes the decision to approve EPA’s policy proposal to lower RINS costs.
