November 10, 2022 - As the leaves turn and temperatures drop, use of home heating oil to warm American homes increases substantially. For many – especially those in cold climates – home heating oil is essential to both comfort and safety.
Unfortunately, millions of Americans will see higher bills for home heating oil and other refined fuel products this year due partly to the Environmental Protection Agency’s (EPA’s) Renewable Fuel Standard (RFS).
Our nation’s independent refineries are essential for producing home heating oil. However, the RFS forced a number of refiners to close their doors and threatens to put more refining capacity at risk, puting even more of our nation’s home heating oil supplies in jeopardy. The sheer cost of RFS compliance also adds to refiners costs, driving up the price of all their products, including home heating oil.
The problem lies in how the RFS is set up. It requires all refiners to blend ethanol and other biofuels into gasoline and diesel. For a variety of reasons, many independent refiners are unable to blend their own ethanol on-site . Therefore, these refiners must purchase credits called, “Renewable Identification Numbers” – known as RINs – in order to demonstrate compliance with the RFS.
RINs originally cost less than one nickel per credit but have since jumped to over $1.70 per credit – an increase of more than 3,000 percent. This increase has proven too much for some independent refiners to bear; several have reported spending more on RINs than on salaries, benefits, maintenance and utitlty costs combined.
The world has already lost 3.3 million barrels of refining capacity since 2020 and distillate inventories (which include on-road diesel fuel and home heating oil) are well below the lowest point of average stocks over the last five years.
More than one-third of the refineries that closed their doors in recent years were based here in the U.S., and of those refineries, one-third closed for reasons attributable to the RFS. As a result, there is less refined oil to go around, meaning there is also significantly less home heating oil available for U.S. consumers, driving up prices and limiting supplies. The Wall Street Journal has reported heating oil costs could be a jaw-dropping 27 percent higher than last season, primarily due to the cratering of imports into the region and also because of refinery closures that have reduced supply. RIN costs attributable to the RFS only make the situation worse.
Today, RINs currently add an estimated 30 cents on every gallon of fuel refiners produce, acting as a hidden tax on independent refiners and consumers alike and driving up the cost of refined fuel products. RINs also represent between 30 to 50 percent of the “crack spread” – the difference between what refiners pay for crude oil and the wholesale prices of oil products on any given day. These numbers make it easy to see that a substantial portion of the “crack spread” supposedly favoring independent refiners is actually RIN cost, rather than refiner profit, significantly contributing to higher refined product prices for everyone.
Additionally, when refiners process crude oil, the refining process requires them to simultaneously produce gasoline, diesel and other products. Typically, two thirds of a refinery’s fuel output is gasoline, with the remaining third diesel. While diesel profit margins remain strong, gasoline margins are not because they are negated by RIN costs. In other words, RINs are so expensive that independent refiners could potentially lose money on the gasoline they produce. Since gasoline represents 67 percent of a refinery’s output, negative gasoline margins could incentivize production cut backs – putting gasoline AND home heating oil supplies at risk.
The Biden Administration must do everything within its power to prevent additional lost refining capacity. With consumers already bearing the brunt of high inflation and energy costs, the Biden administration must take immediate action to lower the costs of RFS compliance to provide relief for independent refiners and consumers alike. Such action is necessary to address today’s high fuel costs and low heating oil supplies, while also preventing additional refinery closures over the longer term.