You can’t see cornfields from the New York Times newsroom, across the street from the Port Authority bus terminal in Manhattan. He also doesn’t spy on many Washington lobbyists, because it’s a three-hour Amtrak ride from the West Side to K Street.
But you can see the occasional stock or commodity trader and a few bankers as they push their way through the crowd during the evening rush to the New Jersey suburbs. And if you’re working on a business story that needs a villain, the easy, if lazy, way to find one is to just look out the window.
Therefore, it is not entirely surprising that a recent Times article blames “speculators” for increasing raw material costs to the detriment of consumers. The article, part of a series to “examine the challenges posed by Wall Street’s influence on markets and the prices consumers pay,” asserts that by “storing” a resource, large banks have exacerbated the effects. of an anticipated shortage, harming producers, and, by extension, consumers. (1)
The strange thing is that the resource in question is not a metal, a fuel or a food. It is a sequence of 38-digit numbers issued by the Environmental Protection Agency.
These Renewable Identification Numbers, or RINs, are part of a government program designed to encourage refineries to mix ethanol with gasoline. Under the program, refiners must obtain RIN by mixing ethanol with their gasoline or by purchasing credits from others who do. Each refiner has its own quota of how much ethanol to use.
The stated purpose of the program is to reduce the use of fossil fuels and curb dependence on foreign oil. In practice, however, the law seems more focused on increasing the use of ethanol, most of which is produced from corn. In 2007, Congress established quotas for the amount of ethanol that refineries must use, with regular scales, until 2022. This year, the figure is 13.8 billion gallons, compared to 13.2 billion for the year. last.
At the time the quotas were set, gasoline consumption was projected to increase 6 percent by 2013. Instead, consumption has declined, but ethanol quotas continue their upward march mandated by legislation regardless. To utilize the required amounts of ethanol, refineries may soon have to start producing blends with higher percentages of ethanol than lawmakers ever intended. Gas that is high in ethanol can be corrosive to some metals and rubbers, including those found in gas station equipment and older automobiles. Higher ethanol blends also reduce fuel consumption and can absorb water from the atmosphere, which has the potential to damage engines.
Rather than trying to convince service stations to buy gasoline that will destroy their equipment and their customers’ vehicles – a tough sell – refineries are looking to buy credits. Financial institutions, however, seem to have gotten ahead of themselves.
According to The Times, citing industry sources, JPMorgan Chase sought to sell an inventory of hundreds of millions of credits at the beginning of the summer. (1) JPMorgan rebutted the claim, saying that it does not actively negotiate the loans and only holds them incidentally on behalf of energy industry customers. Credit trading is done privately, rather than on regulated exchanges, so it is unclear which account is the correct one.
In any case, the price of the loans multiplied by twenty in just six months. The high prices are likely to be passed on to consumers, although gas prices in general have fallen since the beginning of the summer amid ample supply and weak demand.
Yet despite this general equilibrium of supply and demand, an equilibrium that is facilitated by the transfer of NIRs from those who have them to the refineries that need them to continue operating, the Times finds exploitation by Wall Street. (Some of us would characterize this exchange as free markets that simply do what they are supposed to do.) Even when EPA officials claim they have seen “no evidence of improper trading, such as hoarding, in the marketplace,” (1) the newspaper attributes this to poor policing rather than fair play. The article explains, with clear disapproval, “The ethanol loan market is exactly the kind that Wall Street loves: opaque, lightly regulated, and potentially very lucrative.” (1) In other words, people conduct private business privately and earn money from it. Call the authorities.
The real scandal is that in the absence of ill-thought-out government regulation, there would be no shortage of RINs for Wall Street to “blow up.” The merchants are simply playing the field that Congress drew. Congress has the option of redrawing the lines. Linking credits to a refinery’s percentage of ethanol blends, rather than the raw amount used, would be an easy fix.
Unfortunately, that is not likely to happen. In late 2011, the corn lobby appeared to suffer a major defeat when a three-decade tax credit for ethanol use expired. The end of the credit was heralded as a blow to special interests and a victory for taxpayers. Ethanol producers, however, were remarkably unflappable. “We may be the only industry in American history that voluntarily let a subsidy expire,” Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group of ethanol producers, boasted to The Times. (2)
The RIN program explains this lack of concern. Ethanol producers do not need a tax credit to encourage customers to buy their product. They already have a captive market, guaranteed by the United States government. Refineries that do not use their ethanol quotas, or that do not purchase credits to offset, can face fines of $ 32,500 a day.
There are two probable reasons why the corn ethanol industry has landed such an attractive deal. The first is that the industry spent $ 22.3 million on lobbying last year, and nearly 70 percent of lobbyists working on ethanol issues have previously worked or interned for a member of Congress, a committee of the Congress or a federal agency. The second is that Iowa, with its famous presidential caucuses, is a key producer of corn ethanol. The aspiring nominees cannot afford to alienate Iowa corn growers or ethanol refiners.
While the benefits to the ethanol industry are touted as support for America’s hardworking farmers, in reality, the donations increase the cost of corn produced for other purposes, such as livestock feed and the costs of land for other production. agricultural. Those increased costs reach consumers both at the grocery store and at the pump.
Interestingly, the ethanol industry is not the only winner in the game of political favors. While 142 refineries will be subject to the ethanol blending requirement this year, one will not. That refinery, the Krotz Springs facility in Louisiana, owned by Alon USA Energy, received a hardship exemption from the EPA. Three other refineries also applied for the exemption, but Krotz Springs was the only one to receive it. Krotz Springs was also apparently the only one of the four whose parent company paid a lobbying company to discuss the issue of “renewable fuel standards” with lawmakers.
When asked by The Wall Street Journal about the justification for the exemption, the EPA declined to comment. The agency has previously said that it makes such determinations “on a case-by-case basis.”
As for the New York Times complaints about Wall Street speculators driving up RIN prices, I agree that the problem is improper closed-door trading. But the problematic exchanges are exchanges of political favors, not the artificial credits that politicians have created; the doors to be opened are in Washington, not on Wall Street.
Sources:
1) The New York Times, “Wall St. Exploits Ethanol Credits and Price Hike”
2) The New York Times, “After three decades, the tax credit for ethanol expires”