Carl Icahn has called on the EPA to make changes to a market for renewable fuel credits or else risk “the mother of all short squeezes” that could bankrupt refiners, including ones that uncle Carl owns. The letter is repetitive as Carl himself admits but he gets it down to five points after 2,500 words or so. ValueWalk has obtained the full letter which Icahn wrote to the regulators. Susan Gordon a spokesperson for Icahn did not immediately respond for a request to comment. The letter was first reported by Laura Blewitt and Zachary Mider
of Bloomberg News earlier today.


See the full text below (all emphasis is from Icahn).

Dear Administrator Gina McCarthy and Acting Assistant Administrator Janet McCabe:

I grew up on the streets of Queens. I managed to get into Princeton University from a tough high school probably because my scores on the college boards were quite high. After graduating in 1957 and a stint in the Army, I went to Wall Street in 1960. I did not come from a wealthy family. My mother was a school teacher and my father was a disappointed opera singer that barely earned a living. However by 1968, I saved enough to purchase a seat on the NYSE. Since that time, I am proud to say, my average annual return on capital has been 28% per year. I’ve gained a great deal of my profits by understanding markets and the many pitfalls that exist  that most people do not understand. At the risk of being immodest, most respected experts involved in markets and the way they function would agree there are few in the country that understand investing in markets better than I do. I tell you this not because I wish to boast, but because I hope that you will take my following letter and warning very seriously.

Throughout economic history, there are markets that are “rigged” so that certain speculators and companies can profit at the expense of others that are innocently involved. Innocent people and companies are badly damaged and go bankrupt from “rigged” markets. Most crashes and panics have been the result of these types of “rigged” markets, such as the ’29 crash and the recent ’08 housing bubble. The RIN market is a “rigged” market and if not stopped immediately the consequences might well be disastrous. The RIN market will cause a number of refinery bankruptcies; the domino effect of this will be that “big” oil will sop up the bankrupt refineries, causing an oligopoly resulting in skyrocketing gasoline prices. Just as in ’29 and the ’08 housing bubble, these “rigged” markets are deceptive and at first look, relatively harmless. Often in “rigged” markets in their early stages, pundits opine there is no danger. They are always wrong. I warned a number of people in ’08 about the great dangers but to no avail because too many, including leading politicians, were told by respected bankers that there were no problems. Therefore, unfortunately, nothing was done until there was calamity and our whole system almost collapsed.

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. When gasoline is blended with ethanol and/or biofuel, the blender receives something called a “RIN” to prove they blended each gallon of gasoline they produced. The EPA has designated refineries as the “obligated party” to deliver a certain amount of RINs to the EPA each year or be severely penalized. But to make refineries obligated to prove their gasoline was blended is irrational. These refineries will almost certainly go bankrupt unless this obligation is changed almost immediately. Here’s why:

icahn photo
Photo by view from 5’2″

Midsized independent refineries, such as HollyFrontier & CVR Energy, as well as smaller refineries, do not own gas stations and therefore do not control the blending and retail sale of their fuel, but are nevertheless “obligated” to deliver RINs at the end of each year to prove to the EPA that they blended or made sure that the gasoline they produced had been blended with ethanol and/or biofuel. However, while these refineries are capable of blending their gasoline with ethanol, at a cost of only $.01 per gallon, the large gas station chains they sell to have for the most part refused to purchase blended gasoline from them. RINs can only be produced when gasoline is actually blended. Since most gas stations will not purchase blended gasoline from refineries, these refineries cannot produce for themselves the amount of RINs demanded from them by the EPA. As a result, the RIN market has become “the mother of all short squeezes”. Refineries must have RINs to deliver by a date certain but the only persons they can purchase these RINs from are blenders that own large gas stations or big oil companies that blend and also own gas station.

When refineries sell their unblended gasoline at the rack (because no one will buy blended gasoline from them) they try to purchase the RINs they need from the blenders they sell to. The blenders obviously understand the refineries’ predicament and therefore they have realized they can “squeeze” higher and higher prices from the “obligated refiners”. RINs are now selling at over 20x what it would cost the refinery to produce them themselves. But even worse, speculators and large investment banks have now entered the picture and are competing with refineries to purchase RINs from the blenders at the rack. They are also making secret deals with the blenders to entice them not to sell to the refineries but rather to sell to them. These speculators are “hoarding” the RINs hoping to get much higher prices as the time nears when refineries are obligated to deliver RINs to the EPA. This is a classic short squeeze of a “rigged” market which is now entering its most dangerous phase – “HOARDING”. As RINs are “hoarded” their price will move up exponentially and bankruptcies will take place which causes a debilitating domino effect.

On the other hand, reprehensibly “big oil” as well as gas station chains are benefiting from all this because they control the blending but more importantly they control the retail sale of their fuel since they own gas stations and franchisees that are contractually committed to buy their blended fuel. They therefore can avoid the over-priced RIN market. In fact, most of the “big oil” companies blend more than they produce and earn windfall profits selling their excess RINs just like exempt (non-refining) blenders. EPA has done for “big oil” what the Federal Trade Commission would not allow “big oil” to do for itself – destroy its competition. Survival in the intensely competitive transportation fuels market means remaining competitive by constantly improving efficiency. It is impossible for independent and small refineries to

1, 23  - View Full Page