A sure sign that we are barreling headlong into the blend wall, so to speak, is what is happening to the price of Renewable Identification Numbers. As mentioned in my last post, RINs are credits refiners earn for blending ethanol into motor fuels.

If refiners like Valero and ExxonMobil don’t think they will be able to generate enough RINs themselves to meet the Renewable Fuels Standard (RFS) targets set by government, they buy excess RINs on the open market to satisfy their legal obligations.

In the past there was no problem if a refiner came up short; the market for RINs was adequate since, as the U.S. Chamber of Commerce noted, “Over the past several years, refiners have actually blended more ethanol than required, and thus banked ‘credits’.”

Today, however, there seems to be a run on the bank.

Record price for RINs

The reason is that industry is hitting the blend wall and may not be able to meet the RFS mandatory volume targets for 2013, matched with a concern about even higher levels for 2014. These targets were set several years ago by policymakers who relied on government projections of future gasoline demand that have proved to be completely wrong. Gasoline demand is decreasing in the United States, not dramatically increasing as predicted in 2007.

As a result, the scramble among refiners to purchase RINs has sent the price of these credits skyrocketing. Platts Commodity News reported that prices soared to $1.32 per RIN on Monday, the fifth record in the previous six trading sessions. By contrast, RINs traded for two cents apiece last year.

These spiking prices are a market signal that we have reached the blend wall and they carry an economic toll. Refiners will soon be unable to meet fuel demand and comply with the law.  A recent NERA study suggests that, as a result, supply will drop and result in severe gasoline and diesel supply disruptions which will ripple through the U.S. economy and cause significant harm to consumers.

Scrap it and start over

The logical solution to the impending crisis would be for the Obama administration to relax the 2013 and pending 2014 requirements and cap the required ethanol blend at 10 percent. Using higher levels of ethanol (15 percent instead of 10 percent) has the potential to damage engines.  So setting the cap at 10 percent would protect cars’ engines as well as consumers’ pocketbooks.

Beyond that, policymakers should reexamine a program that is “broken beyond repair” and that will create worse problems in future years as the government’s mandates grow bigger. While they are at it they should address the cellulosic ethanol mandate, which requires refiners to blend into the nation’s motor fuel a product that literally doesn’t exist.