U.S. oil refiners that have long absorbed losses from renewable fuels are now seeing those units return to the black, driven by government blending mandates and a concurrent jump in diesel prices tied to the U.S.-Israeli war on Iran. In late March, the U.S. Environmental Protection Agency issued rules requiring record volumes of biofuels to be blended into gasoline and diesel this year and next, including a 60% increase in the use of biodiesel and renewable diesel alongside the continuing requirement to blend about 15 billion gallons of ethanol into gasoline each year.
The combination of firmer policy signals and tighter diesel markets has prompted refiners to boost production of renewable fuels, which has helped restore profitability after a difficult stretch marked by oversupply and weak demand. That earlier downturn followed rapid expansion by producers five years ago and left margins under pressure as supply outpaced consumption.
Among major players, Valero reported that its renewable diesel business swung into a $139 million profit in the first quarter from a $141 million loss in the same period a year earlier. The company also said profits in its ethanol business more than quadrupled. Company executives have characterized the policy shift as a "pretty strong tailwind." HF Sinclair similarly reported a turnaround in renewable diesel results, posting a $133 million profit after a $17 million loss a year earlier. Phillips 66 said losses in its renewable fuels division narrowed sharply; Brian Mandell, the company’s executive vice president of marketing and commercial, told analysts that Phillips 66’s renewable diesel plants are operating above capacity and that investors should expect a "substantial difference" in that segment’s performance compared with a year ago.
Market participants point to multiple channels through which the mandates and tighter diesel supplies are improving returns. The rules effectively underpin demand for biomass-based diesel, according to John Deal, managing director of capital markets at Post Oak Group, and they have supported the market for tradable Renewable Identification Numbers, or RINs. Refiners that blend more biofuel than required can sell RIN credits to other firms that do not blend enough, creating an additional revenue stream for producers with blending capacity.
"The new record mandates bring multi-year certainty and stronger RINs," said Rand Taylor, CEO of Fuel Ox Inc., a supplier of fuel additives to the refinery industry.
RINs are segmented by type, with D4 credits associated with biodiesel and renewable diesel and D6 credits tied to corn-based ethanol. Prices for these credits have climbed sharply, "surging more than 80% this year to over $2 each," according to LSEG data, boosting the economics for refiners that can produce and sell these credits.
"We’ve waited through the hard times. Let’s go harvest these good times," HF Sinclair’s CEO Franklin Myers told investors earlier this month.
Despite the recent uplift in margins, the outlook for longer-term capacity expansion in renewable fuels remains uncertain. Several companies that previously invested in biofuel projects have paused or reversed course when market conditions deteriorated. In 2024, Chevron idled two biodiesel production facilities in the U.S. Midwest, citing poor market conditions. Vertex Energy also paused renewable diesel production at its Mobile, Alabama refinery to shift focus back to conventional fossil fuels.
Feedstock availability and cost present another constraint. Elevated demand from biofuel producers for feedstocks such as soybean oil, together with a seasonal slowdown in soy crushing capacity for spring maintenance, could push soybean prices higher. Traders and analysts warn that higher feedstock prices and limited supply could discourage biodiesel and renewable diesel production or constrain margins, even as mandates raise demand.
At the same time, conventional diesel has become more lucrative in the near term. The international conflict has sharply raised diesel prices - diesel prices have spiked 46% during the Iran war - and with global supplies tight, producing conventional diesel can yield stronger short-term returns than expanding renewable diesel output. Arif Gasilov, a partner at sustainability and ESG consulting firm Gasilov Group, said this dynamic may lead some refiners to prioritize conventional diesel production.
Market observers and industry groups caution that which direction the sector takes will depend on how the interacting variables evolve. Geoff Moody, senior vice president of government relations and policy at the American Fuel and Petrochemical Manufacturers, said the durability of the current trends will hinge on the future behavior of mandates, feedstock markets, and broader diesel supply dynamics.
For now, refiners with blending capacity and access to feedstocks are benefiting from stronger policy certainty and richer revenue streams from RINs and higher diesel pricing. Yet, the combination of earlier project setbacks, feedstock competition, and the lure of immediate returns from conventional diesel creates a complex investment calculus for producers considering new or expanded renewable fuel facilities.
Summary
EPA-mandated record blending volumes and a surge in diesel prices tied to the U.S.-Israeli war on Iran have shifted renewable fuels from a drag on refiners to a source of profit. Major refiners reported swings from losses to gains in renewable diesel and biodiesel businesses, supported by higher RIN prices and tightened diesel supplies. Still, questions linger over whether producers will commit capital to expand renewable fuel capacity amid feedstock constraints and the attractive near-term economics of conventional diesel.