photo by Perry McKenna
You can’t see any corn fields from the New York Times newsroom, across the street from the Port Authority bus terminal in Manhattan. You don’t spy many Washington lobbyists either, because it is about a three-hour Amtrak ride from the West Side to K Street.
But you can spot the occasional securities or commodities trader and a few bankers as they slog through the crowds during the evening rush to the New Jersey suburbs. And if you happen to be working on a business story that needs a villain, the easy, albeit lazy, way to find one is to just look out the window.
So it is not altogether surprising that a recent Times article blames “speculators” for driving up commodity costs to the detriment of consumers. The article, part of a series intended to “examine the challenges posed by Wall Street’s influence over markets and the prices consumers pay,” asserted that by “stockpiling” a resource, big banks have exacerbated the effects of an anticipated scarcity, harming producers, and, by extension, consumers.
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 intended to prompt refiners to blend ethanol into gasoline. Under the program, refiners must earn RINs by mixing ethanol into their gasoline or by purchasing credits awarded to others who do so. Each refiner has its own quota for how much ethanol it must 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 set out quotas for how much ethanol refiners must use, with regular escalations, until 2022. This year, the number is 13.8 billion gallons, up from 13.2 billion last year.
At the time the quotas were set, gasoline consumption was projected to increase 6 percent by 2013. Instead, consumption has decreased, but the ethanol quotas continue their legislatively mandated upward march regardless. In order to use the required amounts of ethanol, refiners may soon have to begin turning out blends with ethanol percentages higher than lawmakers ever intended. Gas with high ethanol content can be corrosive to some metals and rubbers, including those found in gas station equipment and older cars. Higher ethanol blends also reduce gas mileage and can absorb water from the atmosphere, which has the potential to damage engines.
Rather than try to convince gas stations to buy gas that will destroy their equipment and their customers’ vehicles – a tough sell – refiners seek to buy credits. Financial institutions, however, appear to have beat them to the punch.
According to The Times, citing industry sources, JPMorgan Chase sought to sell an inventory of hundreds of millions of credits at the start of the summer. JPMorgan rebutted the claim, saying it does not actively trade the credits and holds them only incidentally on behalf of energy-industry clients. Trading in the credits takes place privately, rather than on regulated exchanges, so it is unclear which account is accurate.
In any case, the price of the credits jumped around twentyfold in just six months. The high prices will likely be passed on to consumers, though gas prices overall have fallen since the start of summer amid ample supply and soft demand.
Yet despite this overall balance of supply and demand – a balance that is facilitated by the transfer of RINs from those who hold them to refiners who need them to keep operating – The Times finds exploitation by Wall Street. (Some of us would characterize this exchange as free markets just doing what they are supposed to do.) Even as EPA officials claim to have seen “no evidence of improper trading, like hoarding, in the market,” the newspaper attributes this result to poor policing rather than fair play. The article explains, with clear disapproval, “The market in ethanol credits is exactly the kind Wall Street loves: opaque, lightly regulated and potentially very lucrative.” In other words, people are conducting private business in private and making money at it. Call the authorities.
The real scandal is that absent a poorly thought out government regulation, there would be no RIN shortage for Wall Street to “exploit.” Traders are simply playing on the field that Congress drew. Congress has the option of redrawing the lines. Tying the credits to a refiner’s percentage of ethanol blends, rather than the raw quantity used, would be an easy fix.
Unfortunately, that’s not likely to happen. At the end of 2011, the corn lobby appeared to suffer a major defeat when a three-decade-old tax credit for ethanol use expired. The end of the credit was trumpeted as a blow to special interests and a win for taxpayers. Ethanol producers, however, were remarkably unfazed. “We may be the only industry in U.S. history that voluntarily let a subsidy expire,” Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group for ethanol producers, boasted to The Times.
The RIN program explains this lack of concern. Ethanol producers don’t need a tax credit to encourage customers to buy their product. They already have a captive market, guaranteed by the U.S. government. Refiners who fail to use their ethanol quotas, or buy credits to compensate, can face fines of $32,500 a day.
There are two likely reasons the corn ethanol industry has managed 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 congressional committee or a federal agency. The second is that Iowa, with its famous presidential-kickoff caucuses, is a key corn-ethanol producer. Would-be nominees cannot afford to alienate Iowa’s corn growers or ethanol refiners.
While perks for the ethanol industry are touted as supports for America’s hard-working farmers, in reality, the handouts drive up the cost of corn produced for other purposes, such as feed for livestock, and the costs for land for other agricultural production. Those increased costs make their way to consumers in the grocery store as well as 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 that received it. Krotz Springs was also apparently the only one of the four whose parent company paid a lobbying firm to discuss the subject of “renewable fuel standards” with lawmakers.
When The Wall Street Journal asked about the justification for the exemption, the EPA refused to comment. The agency has previously said it makes such determinations on a “case by case” basis.
As for The New York Times’ complaints about Wall Street speculators driving up the prices of RINs, I agree that the problem is improper trading behind closed doors. But the problematic trades are exchanges of political favors, not the artificial credits politicians have created; the doors that need to be pried open are in Washington, not on Wall Street.