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Carl Icahn Rails Against The Evils Of RIN City

Aug. 25, 2016 4:15 PM ET1 Comment
Craig Pirrong profile picture
Craig Pirrong

Biofuel Renewable Identification Numbers-"RINs"-are back in the news because of a price spike in June and July (which has abated somewhat). This has led refiners to intensify their complaints about the system. The focus of their efforts at present is to shift the compliance obligation from refiners to blenders. Carl Icahn has been quite outspoken on this. Icahn blames everyone, pretty much, including speculators:

'The RIN market is the quintessential example of a "rigged" market where large gas station chains, big oil companies and large speculators are assured to make windfall profits at the expense of small and midsized independent refineries which have been designated the "obligated parties" to deliver RINs,' Icahn wrote.

'As a result, the RIN market has become 'the mother of all short squeezes,' he added. 'It is not too late to fix this problem if the EPA acts quickly.'

Refiners are indeed hurt by renewable fuel mandates, because it reduces the derived demand for the gasoline they produce. The fact that the compliance burden falls on them is largely irrelevant, however. This is analogous to tax-incidence analysis: The total burden of a tax, and the distribution of a tax, doesn't depend on who formally pays it. In the case of RINs, the total burden of the biofuels mandate and the distribution of that burden through the marketing chain doesn't depend crucially on whether the compliance obligation falls on refiners, blenders, or your Aunt Sally.

Warning: There will be math!

A few basic equations describing the equilibrium in the gasoline, ethanol, biodiesel and RINs markets will hopefully help structure the analysis. (I highly recommend the various analyses of the RINs and ethanol markets in the University of Illinois' Farm Doc Daily. Here's one of their posts on the subject, but there are others that can be found

This article was written by

Craig Pirrong profile picture
Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University. Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues. He holds a Ph.D. in business economics from the University of Chicago.

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Comments (2)

george630 profile picture
I understand the argument. A question: is the cost of blending ethanol negligible?
JosefK profile picture
Rin is a tax. EPA mandates that Ichan buy the RIN and pay the tax.
I don't need any EPA formulas to see that the RFS is the mother of all Big Government tax burdens, in this case pumped into clueless commuter's tanks.
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