Cut in fuel use reignites ethanol debate "Wow, I'm going to double-check that number, it's crazy," exclaims Jeff Hove as instant messages flash up on his computer screen. The number on his screen, though, is correct: the price of a critical US biofuel credit has just breached $1 for the first time, after soaring 1,900 per cent this year. Last week's price move has turned a little-noticed backwater of the energy markets into a near-obsession for dealers such as Mr Hove, in the US corn belt, to energy trading desks in Houston, London and Geneva. Some investors are getting burnt. The market is in "Renewable Identification Numbers," or RINs. These 38-digit codes are at the heart of the US's experiment with green fuels. As Washington requires more ethanol and biodiesel mixed into motor fuel, oil refiners and importers that fail to meet minimum targets have an alternative. They can buy excess RINs, which biofuel producers generate with each gallon they make, and claim them as credits. The sharp rise in RIN prices this year shows what happens when policy clashes with the realities of supply and demand. In 2007, Congress passed a law requiring more and more gallons of biofuels to be sold each year. But highway traffic has declined since then, limiting how much ethanol can be blended with petrol. "People are driving less," says Mr Hove, who sells RINs at RINAlliance in Des Moines. But the volume of renewable fuels required out there is still growing. Until recently there were plenty of RIN credits to close the gap between the government-mandated and actual ethanol use. Excess RINs totalled 2.6bn gallon-equivalents at the end of 2012. But last year the industry used 400m more RINs than were generated, the University of Missouri's Food and Agricultural Policy Research Institute estimates. This year the deficit will more than treble to 1.35bn RINs. Absent a change of heart in Washington or a surprise increase in ethanol blending, stocks of credits are likely to fall to zero sometime next year. "In 2014, the RIN bank is insolvent," says Andy Lipow, head of consultants Lipow Oil Associates. Ethanol mandates have worried agricultural markets for years as they swallowed more of the corn crop, but fears of a spike in grain prices have now eased. "With flat or declining gasoline consumption, there's a real question of how fast higher penetration rates will occur," says Joseph Glauber, chief economist at the US Department of Agriculture. Now energy traders are turning nervous. Some are warning of fuel supply shortfalls on the US east coast, where drivers have fresh memories of fuel rationing after superstorm Sandy. More than half the east coast's petrol demand is met by imports or shipments from the Texas region. "Theoretically, refiners could try to avoid the extremely high cost of RINs by moving more barrels out to export markets, where there is no RIN requirement," says a spokesman for Valero, the independent refiner. If that happens, you theoretically could see price increases at the pump, particularly and probably first in areas like the northeast. Valero owns ethanol plants in addition to oil refineries. Amid the uncertainty, New York gasoline futures have gained 13 per cent this year compared with modest declines in crude. Physical gasoline for May delivery in New York harbour on Monday hit a 25-cent per gallon premium to its Rotterdam equivalent, an eightfold increase from January, according to Geneva Energy Markets. The persistence of this arbitrage opportunity suggests would-be European exporters are deterred by the cost of RINs. Indeed, one oil veteran described "blood everywhere" as wholesale gasoline traders grappled with a market they had once ignored. The biofuel industry says the RIN market is signalling that oil companies should raise standard petrol blends from the 10 per cent status quo, known as E10. The US Environmental Protection Agency has approved a mix of 15 per cent for newer cars, but the oil industry has balked, citing product liability concerns. "The truth is, the E10 "blend wall" was erected by the oil companies themselves, and it is little more than a convenient excuse for their refusal to move to higher-level ethanol blends," Bob Dineen, president of the Renewable Fuels Association, wrote last week. As US ethanol production took off in the past five years, the "food versus fuel" debate took centre stage as policy makers clashed over the wisdom of converting crops to energy sources. Turmoil in the RIN market suggests the next debate will be "fuel versus fuel," or ethanol versus petroleum. This will pitch some of the world's biggest companies against each other.