U.S. ethanol credits spike on refiner demand

*RIN prices have risen from 4-8 cts to 10-11 cents

*2008 deadline for turning in RINS coming up February 28

*Cellulosic RINs worth more than traditional ethanol

By Timothy Gardner

NEW YORK, Jan 14 (Reuters) - Stung by the high price of ethanol, some U.S. oil refiners are buying credits to meet their biofuel requirements instead of actually blending the fuel into gasoline, the head of a year-old exchange offering the credits said.

Under the 2007 Renewable Fuels Standard law that seeks to begin to wean the country off foreign oil, the petroleum industry as a whole must blend 11.1 billion gallons of biofuels like ethanol and biodiesel into gasoline in 2009. That number rises to 36 billion gallons by 2022.

Each refiner has to blend a required amount of biofuel into their gasoline. To track how the oil companies are doing, the government assigns each gallon of biofuel a code known as a Renewable Identification Number, or RIN. Each year refiners prove they have met their obligation by turning in the RINs to the Environmental Protection Agency.

But instead of blending all the biofuels themselves, refiners also have the option to simply buy excess RINS from other refiners who have done extra blending. And that route has become more popular as prices for ethanol have spiked.

"Nobody wants to blend ethanol into gasoline right now because it's just too expensive. They'd rather buy the RINS, which makes a lot more sense," said John Gelbard, who heads the New York-based Rinxchange, the only exchange on which RINs are currently traded.

RINS spiked to 11 cents a gallon late last week after trading at around 4 to 8 cents a gallon for much of the year. Since then they have traded in the 10.5 to 11.5 cent range, Gelbard said.

After being a low-cost gasoline blendstock for refiners in the months before and after oil prices spiked to $147 a barrel last July, ethanol has now shifted to being more expensive than gasoline. Ethanol futures were running at about $1.60 a gallon on Wednesday, for instance, while gasoline was about $1.17 a gallon.

Prices have risen as many ethanol distillers have shut plants or delayed opening them amid the credit crunch and recession. VeraSun Energy Corp VSUNQ.OB was one of the victims and shut distilleries after filed for bankruptcy protection in October.

The RINS market could face a rush ahead of late February when refiners and blenders have to turn their 2008 RINS into the EPA. Some flexibility in the system, such as the ability to borrow credits from other years, could tame the rush, Gelbard said.

The market is not yet well understood and is thinly traded as players wait to see whether President-elect Barack Obama will support the RFS or dismantle it. Ethanol made from corn has been criticized for helping to spike food prices, and for helping to worsen water pollution because of the amount of fertilizer corn plants need.

"It's been a slow process," said Gelbard, whose exchange -- a partnership between the biofuel, brokerage and trading companies Agrifuels, Belzberg Technologies Inc, and I.A. Englander -- has been open about a year.

Some excitement could develop if RINS help spark development of cellulosic ethanol, a new fuel made from fast-growing trees and plants expected to be cleaner than traditional ethanol.

Starting next year, companies that succeed in making cellulosic can earn 2.5 RIN coupons for every gallon they make compared to just one RIN for grain-based ethanol. (Editing by Christian Wiessner)