Carl Icahn (Trades, Portfolio) has long been a vocal critic of the substantial regulatory burden placed on businesses by the U.S. government, and it now looks as if this jawboning has paid off. President-elect Donald Trump appointed him special adviser on regulatory reform Wednesday.
It is unclear which sectors will benefit the most from Icahn’s appointment, but one industry that stands to benefit more than most is refiners.
Crippling sanctions
Icahn has repeatedly attacked the Energy Information Administration’s position on refiners and environmental fuel standards, blaming the government body for trying to destroy the refining industry.
It all comes down to renewable identification numbers (RINs), which are electronic credits created as part of the Renewable Fuels Standard, a biofuels mandate passed by Congress in 2005. RINs are generated when renewables, like ethanol, are blended into gasoline and diesel fuel. Oil firms that are not able to blend are required to purchase RINs to comply with the biofuels mandate.
For big oil these credits have not been an issue, but for merchant refiners that are unable to blend RINs have turned out to be a massive headache.
The blenders, which are often gas station chains, have been able to generate profits by selling RINs awarded to them by blending renewable fuel, and refiners have been forced to buy these credits at whatever the cost.
Devastating impact
The market for RINs is not just limited to blenders and refiners; anyone can buy them including Wall Street traders. With Wall Street sensing easy profits the RIN market has quickly ballooned into a $15 billion per year spectacle for manipulation, speculation and fraud. In 2012 each credit cost a penny, but this July the price hit 98 cents.
The massive increase in price for RINs has had a devastating effect on refiners without retail filling stations or ethanol blending facilities. Shares in refiners CVR Refining (CVRR, Financial), HollyFrontier (HFC, Financial) and PBF Energy (PBF, Financial) were at one point this year down 54%, 41% and 46% for the year as profits collapsed. PBF Energy, one of the largest independent refiners in the U.S., was at one point believed to be spending close to $1 billion per annum on RIN credits, severely hampering the company’s ability to invest in its operations, return cash to investors and carry out standard maintenance.
According to Bloomberg, refiners unable to blend are expected to spend $1.8 billion this year on RIN credits. Valero (VLO, Financial) and CVR will pay around $200 million each while HollyFrontier’s bill will come in at $400 million. In total, the industry is expected to spend $1.8 billion in 2016.
Icahn has been a vocal critic of these credits, going so far as to write an article in the Wall Street Journal calling out the EIA on its limp response and the destructive effect RINs could have on the U.S. economy as a whole.
“The EPA has refused to fix a system that is clearly broken, ignoring obvious and repeated warnings. On Nov. 10, after years of inaction, the agency announced that it will open a regulatory docket and take public comment on changing the 'point of obligation' to close the blender loophole. This move, in the waning days of the Obama administration, is a step in the right direction but seems to be simply the EPA’s attempt to justify the failing status quo.
“If the small and merchant refineries start shutting down, it will jeopardize the economy and national security alike. The Trump administration, with new leadership at the EPA, should move quickly next year to reform the biofuels mandate and forestall the crisis.” -–If Oil Refiners Crash, So Will the Economy
Now that he’s virtually in charge of the regulatory environment, Icahn will most likely quickly act to change these laws and unlock billions in extra profits for refiners in the process. The former corporate raider also has a financial incentive to act as he virtually owns CVR Refining.
Disclosure: The author owns shares in PBF Energy.
