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TMFDeej (99.46)

Are refiners in for a big surprise?

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July 26, 2010 – Comments (11) | RELATED TICKERS: VLO

According to Saturday's Des Moines Register: 

"The ethanol industry is fracturing and under attack inside and outside the Capitol. Theindustry's 45-cent-a-gallon subsidy is due to end at the end of the year, but energy bills that could provide a means of extending the tax credit have been delayed, throwing the legislation's future in doubt. 

In the House, the tax-writing Ways and Means Committee is working on a plan to continue the subsidy for a year but cut it by 20 percent to 36 cents a gallon. Action on it also has been put off until September. 

The 54-cent-a-gallon tariff on imported ethanol is also set to expire this fall, and the Brazilian sugarcane ethanol industry is expressing optimism Congress will cut if noteliminate it." 

Gasoline refiners would still be required by law to purchase and blend 13 billion gallons of ethanol with gasoline in 2011 pursuant to the Renewable Fuel Standard enacted by Congress in 2007. Refiners, however, wouldn't receive a 45 cent pergallon tax credit if Congress allows the subsidy to expire. 

The net effect of eliminating the subsidy is the cost the refiner pays for ethanol would effectively increase 45 cents a gallon. This would leave gasoline refiners and distributors with significantly lower operating margins. 

The most important issue for the ethanol industry is what Congress does regarding the 54 cent a gallon tariff on imported ethanol which alsoexpires at the end of December. 

If the current import duty is lowered or eliminated, imports of ethanol from Brazil would displace U.S. ethanol in cities within 150 miles of the major East and West Coast ports and along the Gulf states which includes most of the major population centers in the U.S. 

If the import tariff on ethanol were eliminated, production of ethanol in the U.S.would fall more than 25%. 

Nothing is certain in the world of politics, but if the subsidy is eliminated and the import tariff is not refiners could be in for a major hit to their margins.  

If the subsidy is allowed to expire, but imports from Brazil are no longer taxed, it would be a boon for Brazilian ethanol companies and a major hit to the U.S. ethanol industry. 

Deej 

11 Comments – Post Your Own

#1) On July 26, 2010 at 5:46 PM, Option1307 (30.45) wrote:

This is indeed an interseting development; however, what is to prevent refiners from simply raising their prices to compensate for their own cost increases, e.g. passing on their cost increase onto the consumers?

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#2) On July 26, 2010 at 6:15 PM, goldminingXpert (30.65) wrote:

I hate ethanol. It better not mess up my plans for TSO, CLMT and WNR.

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#3) On July 26, 2010 at 7:27 PM, rd80 (99.12) wrote:

If the current import duty is lowered or eliminated, imports of ethanol from Brazil would displace U.S. ethanol in cities within 150 miles of the major East and West Coast ports and along the Gulf states which includes most of the major population centers in the U.S.

Wouldn't the location of the refineries be more important than the location of the cities? Or does the ethanol get blended in futher downstream than the refinery?

Regardless, I think your 150 miles inland is too restrictive.  Barge traffic could get Brazilian ethanol far into the interior of the country.

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#4) On July 26, 2010 at 9:31 PM, Brothern (< 20) wrote:

"... prevent refiners from simply raising their prices to compensate for their own cost increases, e.g. passing on their cost increase onto the consumers?"

Ethanol is incredibly inefficient to produce. Even an elimination of a couple cents per gallon would bring it to being produced at below cost.

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#5) On July 26, 2010 at 9:46 PM, NOTvuffett (< 20) wrote:

Subsidies don't lower the cost of anything, just hides their true cost.  Benefits the few at the expense of the many.  Same thing for tariffs.

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#6) On July 27, 2010 at 11:32 AM, ajm101 (33.74) wrote:

You could consider gas station companies, too.  DK and PTRY are the only ones I know of offhand.  DK has substantial refinery operations, too.  They operate at very thin margins on gas, so any increases in margin can result in substantial increases in EPS.  They have there warts like any other company/sector, though.  (long DK and PTRY)

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#7) On July 27, 2010 at 12:29 PM, leohaas (92.47) wrote:

Not so sure this has any impact at all on refiners. True, their cost may go up (it will in the scenario where the 45c subsidy expires, and the 54c import duty does not; not in any other scenario), but this is the case for all refiners. In other words, there will be no competitive force preventing the refiners from increasing their prices. Same goes for gas stations. That means that we as consumers end up paying 4.5c/gallon extra (gasoline typically contains 10% ethanol). But since we as taxpayers no longer shoulder the subsidy, the whole thing is a wax for us...

Disclosure: long VLO at the time of writing.

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#8) On July 27, 2010 at 12:54 PM, miteycasey (93.82) wrote:

yippie!!!

I hope the tariff and subsidy go bye-bye. 

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#9) On July 27, 2010 at 2:15 PM, JakilaTheHun (99.93) wrote:

I'm crossing my fingers it gets eliminated.  It's very wasteful and inefficient on every level.  Even the supposed "environmental" aspect is complete bunk --- there are no environmental benefits to corn-based ethanol. That, of course, hasn't stopped the ethanol industry from shamelessly promoting it as a "green fuel."

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#10) On July 27, 2010 at 2:54 PM, Option1307 (30.45) wrote:

+1 for comment #9

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#11) On July 27, 2010 at 11:10 PM, Tastylunch (29.89) wrote:

ditto to what jakila said

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