Americans, particularly during this heated election season, can be forgiven if they assume that their government never listens to them. Read more
In simplest terms, the Corporate Average Fuel Economy (CAFE) standards are where national security meets cleaner air. Read more
Car enthusiasts rejoice!
About three months ago, Cody Bishop, his wife Katie and their infant son went shopping for a new car, or rather a used car that was new to them. Like everyone, they had a multitude of choices. They narrowed them to a plug-in hybrid Chevy Volt and a shiny, black 2011 Volkswagen Jetta diesel TDI.
United Airlines took a giant step toward cutting its reliance on foreign fuels last week when it made $30 million investment in Fulcrum BioEnergy, one of the leading manufacturers of aviation biofuels made from municipal waste.
The move is being touted as a step toward reducing carbon emissions, although there are some doubts about its impact in that respect. But reducing consumption of jet fuel certainly will have a significant effect in reducing our dependence on foreign oil.
Last year, United’s fleet of aircraft consumed 3.9 billion gallons of jet fuel, at a cost of $11.6 billion. Fuel costs represent 40 percent of any airline’s total expenses, and any move that cuts into that expense would be huge. Jet fuel currently sells for $2.11 a gallon, whereas Fulcrum says it can provide biofuel for less than $1 per gallon. More than 12 percent of our oil goes to making jet fuel.
Fulcrum has developed and certified a technology that can turn municipal waste, like household trash, into a sustainable aviation fuel that can be blended with existing jet fuel. The company is currently building a refinery called the Sierra BioFuels Plant near Reno that is scheduled to begin operation during the third quarter of 2017. The company also has plans for five more refineries around the country.
Biofuels are having some difficulty penetrating the automobile market, for a variety of reasons. But they’re perfectly suited for airlines. For one, they are a “drop-in” fuel that can be substituted for jet fuel without any changes. It will not require a whole new national infrastructure.
Second, airlines do most of their fueling at centralized locations. This eliminates a lot of difficulty in transporting and distributing the fuel. United, for instance, can fuel a very high percentage of its flights from its hub in Los Angeles.
Third, with jet biofuel there’s no risk of hitting the “blend wall” that supposedly limits ethanol to 10 percent of the gasoline mix. United says it will begin using Fulcrum’s fuel in 30 percent of its fuel mix for the first two weeks of flights between Los Angeles and San Francisco this summer. After that, the biofuels will be mixed in with its entire fuel stock.
United’s deal with Fulcrum is just one of several recent efforts by airlines to get into the biofuels business. Alaska Airlines aims to use biofuels at one of its airports by 2020. Southwest Airlines announced last year it would purchase 3 million gallons of jet fuel made from wood residues and produced by Red Rock Biofuels. And last year British Airways joined with Solena Fuels to build a biofuel refinery near London’s Heathrow Airport for completion by 2017.
United is on its third venture into the field. In 2009 the company made an unsuccessful attempt to introduce jet fuel manufactured from algae. Then in 2013 it agreed to buy 15 million gallons over three years from California-based AltAir Fuels, which makes biofuels out of inedible natural oils and agricultural waste. United is expecting the first 5 million gallons of Fulcrum fuel to be delivered to its LAX hub this summer.
The decision comes at a good time for the airlines, because the Environmental Protection Agency is starting to make noise about regulating the emissions of jet planes. Jet planes account for only 3 percent of our carbon emissions, but the number is growing rapidly. The Obama administration is proposing to set limits for airliner emissions. The International Civil Aviation Organization, a United Nations agency, is also expected to complete its own deliberations on setting standards to limit airline emissions by next February.
Fulcrum claims its technology will reduce the airlines’ carbon emissions by 80 percent, but this is based on dubious math that says carbon emissions count for zero if they do not come from fossil fuels. This premise has been challenged by a growing number of scientists who say that the whole logic of biofuels is flawed. Professor Timothy Searchinger of Princeton University has become a gadfly to the industry, arguing that if a forest is cut for biofuels consumption, it will be 90 years before this carbon can be replaced by new growth. A group of 78 scientists recently sent a letter to EPA Administrator Gina McCarthy warning against the new EPA policy of encouraging the substitution of wood for coal. They said there would be no savings in carbon emissions.
The same logic applies, to some degree, to the use of municipal waste for biofuels. If the waste remained in landfills, it would be stored and not feeding its carbon content to the atmosphere. Therefore, it doesn’t make much difference if they are substituted for fossil fuels – the carbon output is the same. There is some benefit to using it, however, since some carbon from municipal waste ends up escaping from landfills as methane, and many facilities are required to capture it.
As far as gaining an advantage in cutting the level of foreign fuel imports, however, there is no question that biofuels can substitute for jet fuel on a 1-to-1 basis. Airlines are at a disadvantage in that they cannot be powered by electrification or natural gas, as is starting to occur in the automotive sector. Therefore, the amount of municipal waste-based fuel that can be substituted for oil-based jet fuel will be significant. And after all, the nation is certainly not going to run out of household trash.
(Photo from Hub.United.com)
Anyone who thought that the EPA’s publication of its proposed Renewable Fuel Standard for 2014, 2015 and 2016 was going to settle the ethanol debate has definitely got another thing coming.
The EPA ruling has simply made the situation more contentious and complex. In fact, nobody really knows where ethanol is headed now.
Consider the following developments:
- The industry hit an all-time high first week in June, producing 992,000 barrels per day, equal to the old record of Dec. 19, 2014, and 100,000 barrels more than the first week in May. This despite the argument from the industry that the EPA measure is crippling the industry.
- Gasoline consumption rose 3 percent over the first quarter, the fastest increase in a decade. Gasoline costs $1 less a gallon than it did a year ago, and motorists are responding by driving more. The more gasoline consumed, the more ethanol will be consumed, since it makes up 10 percent of each gallon.
- While the EPA may have underestimated the amount of ethanol that will be consumed in a year, the agency has definitely overestimated the amount of “advanced” ethanol the industry can produce. This is supposed to be an incentive for the development of cellulosic ethanol, but cellulosic plants are having a hard time getting off the ground. It’s not at all certain that cellulosic ethanol will ever be available in commercial quantities.
- Through a quirk in the law, the EPA counts sugar-based ethanol as an “advanced technology” in opposition to corn-based ethanol. Therefore, refineries are allowed to count sugar-based ethanol toward their EPA “advanced” quota. The result has been a boon to Brazil, which saw its exports of sugar-based ethanol triple over the past few months. There is very little sugar-based ethanol produced in this country. The price of Renewable Identification Notices (RINs), whereby refiners show they have added “advanced” ethanol to their gasoline, rose to its highest level in two years since the EPA announcement. Meanwhile, the price of RINs for corn-based ethanol has fallen by 50 percent over the same period.
And so it goes, round and round. All this has left commentators scratching their heads as to where the industry is headed. On OilPrice.com, Colin Chilcoat wrote a column asking, “Has U.S. Ethanol Production Topped Out?” Accompanying it was a graph showing that ethanol production has leveled off at 9.8 percent of every gallon over the last three years:
This puts consumption just below the 10 percent “blend wall,” at which ethanol supposedly starts to harm engines. But that’s not the whole story. As Chilcoat writes: “Buoyed by high exports – up 33 percent from 2013 – ethanol production totaled more than 14.3 billion gallons in 2014.” American ethanol is starting to find markets abroad, even as we import more from Brazil.
Then there’s the question of whether that “blend wall” really exists. There’s no question that ethanol corrodes steel. That’s the reason it can’t be shipped in pipelines – which makes it very expensive to get it from farm country to the East and West coasts. But steel has been replaced by rubber in fuel-injection systems, and the danger no longer exists for cars built after 2001. Then there are the flex-fuel vehicles, of which there are some 17 million on the road today. They can handle any liquid fuel. Finally, an older car can be modified by replacing the steel parts in the fuel system through a simple procedure that costs less than $200. E85, a mixture of 85 percent ethanol and 15 percent gasoline, is being sold all over the Midwest, where support for ethanol is strong. And the Obama administration’s Department of Agriculture has just appropriated $100 million for gas stations that can dispense all varieties of ethanol.
“Unfortunately, the EPA continues to cling to the ‘blend wall’ methodology that falsely claims ethanol has reached its saturation point at a 10 percent ethanol blend,” Bob Dinneen, president the Renewable Fuels Association, complained. “The Agency has eviscerated the program’s ability to incentivize investments in infrastructure that would break through the blend wall and encourage the commercialization of new technologies.”
Perhaps the biggest shift has come from environmental groups, who were once ethanol’s biggest supporters but who have done a 180-degree turn and are now among its biggest opponents. The Environmental Working Group recently published a paper claiming that corn ethanol actually produces a 20 percent increase in carbon emissions and is a contributor to global warming. EWG estimates that the production of E10 in 2014 resulted in 27 million tons more carbon emissions than if American drivers had been burning ethanol-free gasoline (E0). A study by the World Resources Institute purports to show that where carbon emissions are concerned, ethanol does more harm than good. Friends of the Earth, once a supporter, is now one of ethanol’s most vocal detractors.
Yet the public seems to be still behind the ethanol effort. A poll conducted by RFA found that 62 percent of the public favors corn-based ethanol, while only 18 percent were opposed. The number rose to 69 percent when people were asked if manufacturers should be required to offer flex-fuel vehicles.
So the EPA is limiting the production of corn ethanol, which is plentiful, while providing broad leeway to cellulosic ethanol, which doesn’t yet exist at scale. To top things off, Sen. John Cassidy of Louisiana introduced a bill to do away with the Renewable Fuel Standard altogether, making all gas E0 again. Senators Diane Feinstein of California and Pat Toomey of Pennsylvania already have a similar bill in the hopper.
The last act of the ethanol story has definitely not been written yet.
Nobody is happy with the EPA’s ruling on ethanol’s Renewable Fuel Standard made last week. The agency finally published its numbers after dodging the issue for two years and falling far behind on its legal obligations.
“It’s Christmas in May for Big Oil,” said Republican Sen. Chuck Grassley of Iowa. “President Obama’s EPA continues to buy into Big Oil’s argument that the infrastructure isn’t in place to handle the fuel volume required by law. What happened to the president who claimed to support biofuels? He seems to have disappeared, to the detriment of consumers and our country’s fuel needs.”
Gov. Terry Branstad of Iowa, also a Republican, was not quite so negative. “We are disappointed that the EPA failed to follow the renewable volume levels set by Congress,” he said. “But we’re encouraged that the agency has provided some stability for producers by releasing a new RFS proposal, and made slight increases from their previous proposal.”
Even the question of whether the EPA’s new standard represents an increase or a decrease in the required amount of ethanol is under dispute. The original law, passed by Congress in 2007, specified that oil refiners were to absorb 14 billion gallons by 2013, 17 billion by 2014 and 19 billion this year. By 2013, however, it became obvious that the country would be unable to absorb 14 billion gallons without spilling over the “blend wall,” the standard of 10 percent ethanol that’s blended into virtually all gasoline in the U.S. There are concerns that some older vehicles can’t handle higher ethanol blends beyond E10 without sustaining damage to parts.
“By adopting the oil company narrative regarding the ability of the market to effectively distribute increasing volumes of renewable fuels, rather than putting the RFS back on track, the Agency has created its own slower, more costly, and ultimately diminished track for renewable fuels in this country,” Bob Dinneen, president and CEO of the Renewable Fuels Association, said in a statement.
The critics seem to have a point. Blends of E15 (up to 15 percent ethanol) and E85 are being sold across the country without any difficulties. Cars built since model year 2001 are approved to run on E15, and about one-third of automobiles are now flex-fuel, meaning they can tolerate any ethanol blend, up to E85. But the EPA has stuck with the “blend wall” in order to accommodate the oil refiners and automakers, who say they will not honor warranties on engines that might be damaged by ethanol.
The EPA standards announced last week are: 15.93 billion gallons for 2014 (that approximates actual sales for that year), 16.3 billion for 2015 and 17.4 billion for 2017. All these figures are about 5 billion gallons below the original statutory requirements. The last two have caused the most controversy. Ethanol supporters say the EPA is bound by the number in the 2007 law — even though there is a waiver provision. But critics who want to cut back on ethanol use argue that the figure is actually increasing from year to year and is only considered a reduction because it doesn’t match the original projections if 2007.
Really, it’s kind of ridiculous to think that Congress could predict exactly how much ethanol could be sold eight years hence. Typically, they made straight-line projections and assumed that gasoline consumption would hit 160 billion gallons per year by this time and keep going up. In fact, gasoline consumption started to drop almost the minute Congress passed the law, resulting from both improved fleet mileage and the reduction in driving that came with the recession. It now stands at 140 billion gallons. Had the law simply specified that ethanol consumption should be 10 percent of all gasoline consumption, there would be nothing to argue about.
The other place where the law is completely out of whack is in the mandates for non-corn ethanol made from cellulosic materials. At the time it was anticipated that cellulosic ethanol was right around the corner, and Congress specified that consumption should be 3.75 billion gallons in 2014, 7.2 billion gallons by 2017 and 21 billion gallons by 2022. In fact, the cellulosic-ethanol industry produced only 1.9 billion gallons in 2014 and has not increased much since. At one point, the EPA was actually fining oil refiners for not using a fuel that didn’t exist.
There’s little reason for either Congress or the EPA to be meddling in the ethanol market. Ethanol has established itself as an oxygenator and high-octane additive since the banning of MTBE. It would probably be added at a rate of around 10 percent, even without the mandates. E85 has a big price advantage over gasoline and would sell more if it were available. Last week, on the same day that the EPA published its new proposed Renewable Fuel Standard benchmarks, the Department of Agriculture pledged to match state funds for $100 million for the construction of new fueling stations designed to dispense E85. The fuel is very popular in the Midwest and would probably attract customers in other areas if it were easily accessible.
Finally, an export market for American corn ethanol is starting to take shape. Brazil mandates 35 percent of its fuel must be ethanol, but it has had problems with its sugar harvest and has started to import from the U.S. Europe is also getting big on ethanol and is looking across the Atlantic for new supplies.
Ethanol has proved its worth as a fuel additive and possibly as a gasoline substitute as well. All the sturm and drang over the EPA mandates have very little to do with the future of the industry.
Everybody knows that investing in ethanol right now is a bad bet. The logic is simple: The national average price for a gallon of regular gasoline was $2.45 on Thursday, down about 30 percent from this time last year. Ethanol prices have dropped as well.
On top of that, you have the uncertainty of whether the EPA will ever issue a Renewable Fuel Standard for 2014, let alone 2015. Marin Katusa, chief energy investment strategist for Casey Research, is warning investors:
[Warren] Buffett would tell you, if you asked him, that an investor should absolutely avoid the ethanol market in the current market. Why? Because of his two rules:
1. Don’t lose money.
2. Don’t forget rule #1.
Yet if the ethanol effort is about to run out of gas, how do you account for stories like this:
Ethanol industry pretax profit estimated at $7.8 B for 2014 (Ethanol Producer magazine)
The U.S. ethanol industry came off its best streak of profitability in January, one that ran 95 consecutive weeks without a loss for the model Iowa plant used to estimate and track industry profitability. … University of Illinois economist Scott Irwin presented his analysis of ethanol profitability in a recent FarmDocDaily post, “2014 really was an amazing year for ethanol.”
Ethanol plant stays profitable in challenging times (Farm and Ranch Guide)
Changing over from powering Red Trail Energy LLC with coal to using natural gas is a major step forward for this ethanol plant in southwestern North Dakota. With the changeover from coal to natural gas in March, the plant will be able to produce more ethanol, according to Gerald Bachmeier, CEO of Red Trail Energy LLC. … “We’re excited about the change and the opportunity to reduce our carbon footprint,” he said.
Pacific Ethanol reports 2014 was a record year (Ethanol Producer)
Pacific Ethanol Inc. has released 2014 financial results, reporting record net sales, gross profit, operating income, adjusted EBITDA and gallons sold. Neil Koehler, CEO of Pacific Ethanol, called 2014 a pivotal year and stressed that the company met and exceeded all of its goals for 2014. Shares of Pacific Ethanol were up 23.4 percent at $11.51 Thursday afternoon.
Something is going on in the ethanol industry that commentators haven’t quite grasped. I would put it this way: The industry has matured to the point where it doesn’t much matter how much ethanol the government says we have to consume. The industry has outgrown the Renewable Fuel Standard.
Here’s another headline that indicates what’s going on:
Louis Dreyfus Commodities has shipped a large cargo of U.S. ethanol worth $17 million to the Middle East traders said, stoking hopes among U.S. producers of renewed appetite from some buyers overseas. Dreyfus, one of the world’s largest commodities merchants and a major ethanol player, is sending 280,000 barrels of ethanol from the Port of New York to Jebel Ali in the United Arab Emirates, where it will be blended into gasoline for Iraq, according to four traders familiar with the move.
This followed on a February 27 report that Dreyfus had also shipped 3.56 million gallons by tanker to Brazil, which is the world’s leading consumer of biofuel.
“Consumption was surprisingly high last year and now mills must refill inventories,” Mauricio Muruci, an analyst with Porto Alegre, Brazil-based research firm Safras & Mercado, told Bloomberg. Brazilian ethanol demand jumped 15 percent to 5.41 billion gallons last year, the highest level since 2010, data from Sao Paulo-based sugarcane group Unica show. Ethanol, produced from corn in the U.S. and sugarcane in Brazil, is used as a transportation fuel undiluted or in a blend of 25 percent of the biofuel and 75 percent gasoline in the Latin American country.
So American ethanol is filling gas tanks in Iraq. It is replenishing inventories in Brazil, which uses more ethanol than any other country. Is there any doubt that there is a world market for this product?
The opening of world markets comes just at the time when the impracticality of the Renewable Fuel Standard is becoming too difficult to ignore. Senators Diane Feinstein (Democrat of California) and Pat Toomey (Republican of Pennsylvania), a kind of east-west alliance, have introduced a bill ending the Renewable Fuel Standard altogether.
This past weekend at the annual Iowa Ag Summit, a passel of Republican presidential hopefuls addressed the ethanol issue, and none of them was very enthusiastic. This contrasted starkly with the usual kowtowing to Iowa farm interests that characterizes the run-up to the Iowa caucuses, the first official event of the primary season. In 2012, both Newt Gingrich and Mitt Romney, who had publicly opposed ethanol subsidies, buckled under pressure and supported ethanol. That may not happen this time around. With several candidates opposing the RFS — and with Iowa mattering less and less to Republican Presidential hopefuls — the group may get up the courage to defy the state on the issue.
And the question must be asked: “Does it really matter?” Corn-bred ethanol seems to be doing very well despite the falling price of gas. And there is this report out of the University of Illinois:
A recent study simulated a side-by-side comparison of the yields and costs of producing ethanol using miscanthus, switchgrass, and corn stover. The fast-growing energy grass miscanthus was the clear winner. Models predict that miscanthus will have higher yield and profit, particularly when grown in poor-quality soil. It also outperformed corn stover and switchgrass in its ability to reduce greenhouse gas emissions.
It’s obvious the industry is still maturing. Iowa farmers may be much better off growing miscanthus on marginal land while sticking to their normal rotation of corn and soybeans. And as long as there are cars on the road, there will always be a market to buy it.
[Disclosure: On the basis of research for a previous Fuel Freedom article, the author recently purchased a small holding of Pacific Ethanol stock. So far he is happy with the investment.]
My question concerning the Institute derives from a desire to build a now absent civil dialogue concerning policy issues affecting the U.S. The Institute, when a reasonably informed national dialogue on policy existed, was an important participant. Now, that it has been lost, the Institute’s agenda and body of work offers hope that it can be resurrected someday soon. In this context Robert Bryce’s article in today’s New York Times, “End the Ethanol Rip-Off” concerns me. His article is filled with factual and interpretative errors that skew his conclusions concerning the Renewable Fuel Standard (RFS).
Bryce asserts that corn ethanol is responsible for significant environmental problems particularly related to land use, harvesting and processing fuel. He also states that it generates higher food costs, and that it damages small engines. Finally, according to the author, ethanol’s price has been and is generally higher, much higher, than gasoline. The only thing he left out is that ethanol is the cause of global warming, the Israeli-Palestinian conflict, unemployment, the trial and tribulations of Miss America contests and bouffant hairstyles in Texas.
No fuel used now in America is perfect. Certainly, the DNA of gasoline, which Bryce seems to champion, is much more harmful to the environment, and the nation’s need to reduce GHG emissions. Gasoline use also reflects significantly more public health problems and continues the nation’s dependence on imported fuels.
Let me try to summarize some of the facts that Bryce overlooks or does not seem to know:
- Although a cleaner burning fuel, E10 (10 percent ethanol) blended with gasoline does result in a small energy content gap that requires a purchase of additional E10 gasoline to secure mileage equivalency. But, up until recently, the lower price of E10, compared to gasoline, has more than made up for mileage differentials and slowed down the upward trend of the price of gasoline and put downward pressure on prices.
- E85, which the author does not mention, has been approved by the EPA for certain vehicle classes. Like E10, its use does result in lower mileage per gallon when compared to gasoline and also results in more mileage per BTU. The mileage gap is lower than the gap that Bryce indicates in his article. Again, before the decline of gas prices , the gap was more than made up by the lower costs of ethanol and its’ increased efficiency.
- There is no real consensus on the food vs. fuel debate. The World Bank has changed its position on this globally over the years and the Congressional Budget Office (CBO) has suggested that if there is a negative effect on food, it is very minor. Indeed, while the food vs. fuel argument has not yet been settled, most experts agree that increased oil prices contribute to increased food prices. The food vs. fuel argument has reflected an “on the one hand, on the other hand” dialogue. Perhaps more relevant, particularly with respect to corn, there are land use and processing techniques now being introduced that would mitigate possible problems. Certainly, corn is not in short supply and the price of corn to the consumer has not spiraled up significantly.
- The author also neglects the fact that natural gas- and cellulosic-based ethanol (as well as other feedstocks) maybe on the horizon. Investors have delayed involvement, primarily because of uncertainty concerning the market and gasoline prices. Its advent will likely lessen food vs. fuel issues and help lesson environmental concerns.
- Bryce suggests that ethanol, (again, he refers to E10 in his article), has a negative effect on engines. Most of the independent analysis of the impact of ethanol on engines, E10 as well as E15 and E85, suggest differently. The EPA has approved the sale of each blend with certain vehicular limitations with respect to E 15 and E 85.
Bryce spends much time talking about the cost to the consumer of ethanol and the so-called ethanol tax. Curiously, given his location in the Manhattan Institute, he neglects to mention the significant cost to the consumer of the failure of oil companies to open up the gasoline market to alternative fuels like ethanol. Try going to a “gas” station to buy E85 or to charge your electric vehicle. Good luck finding one near your home or easily on a long trip. Through tough franchise agreements, oil companies eliminate competition around the nation. I suspect the imputed tax caused by the oil companies’ monopoly or almost-monopoly position is quite higher, much higher, than the tax that Bryce suggests results from ethanol use. The Institute should pay for a copy of Adam Smith and give it to the author.
Bryce’s article does not really contribute to a needed transparent debate over Renewable Fuel Standards or the wisdom of alternative fuels. It mixes up concepts and facts concerning energy content, car performance and efficiency. It sweeps over serious issues with respect to food vs. fuel and the environment with a broken brush or broom. Its conclusion concerning ethanol and implicitly other alternative fuels is inconsistent with his assumed anti-regulatory position and belief in the market place. We need such a debate, one that reflects a comparison between alternative fuels such as ethanol and gasoline as well as one that accommodates a needed transitional strategy between alternate and renewable fuels.
Photo Credit: East TN Clean Fuels Coalition
During an 18-month stretch, from June 2013 to December 2014, American-made ethanol was riding high. The industry produced 13.9 billion gallons and was making 63 cents per gallon, for an annual profit of $8.8 billion.
Then oil prices collapsed. The results have not been good for ethanol. Sales have been squeezed and profit margins have almost disappeared entirely. Ethanol producers must keep their price below the rate of gasoline, and that has become difficult. After gasoline fell below $2 per gallon in some places, ethanol was squeezed right out of the market. Instead of buying ethanol, refiners purchase Renewable Identification Numbers (RINs), which give them credit for putting ethanol into their blends. RINs have gained 36 percent in the past year, to 71.9 cents a gallon on the New York Mercantile Exchange, which shows how they have become a popular method of avoiding ethanol purchases.
As a result, major refiners are either throttling back or closing some of their higher-cost operations completely. The Valero Energy Corporation and Green Plains Renewable Energy, which together make up about 15 percent of U.S. ethanol capacity, have reduced their operations, according to Bloomberg. At a typical mill in Illinois, profit margins have virtually vanished after netting $1.33 per gallon only a year ago, according to AgTrader Talk, an Iowa consulting company. As a result, U.S. ethanol output fell 4.6 percent to an annualized rate of 14.5 billion gallons, from a record of 15.2 billion gallons, for the week ending Feb. 20, according to the Energy Information Administration.
All this illustrates how vulnerable ethanol will be if the Environmental Protection Agency ever gets around to publishing its “renewable fuel mandate” for last year or this. The EPA is supposed to issue a number each year for the amount of ethanol that will be incorporated into gasoline sales, in accordance with a 2007 law. But last year, with gasoline consumption actually declining because of economic weakness and improved fleet mileage, it became obvious that ethanol consumption could not reach the mandated level of 14.2 billion gallons without going over the mythical “blend wall” of 10 percent, at which point ethanol might damage some older engines. Most cars sold since 2004 can tolerate higher blends, and there are pumps where 85 percent ethanol is available. Still, the EPA has remained reluctant to abandon its conservative position and has tried to reconcile the 10 percent figure with declining gasoline consumption. Even the current 14.5- billion-gallon annual target would exceed the blend wall, and the EPA is in danger of sticking the country with too much ethanol. Inventories already stand at 21.6 million barrels, the highest level since 2012.
Added into all this is the price of corn, which remains the most widely used feedstock for U.S.-made ethanol. Last year the price of corn reached $8 per bushel and averaged $4.43 for the year. Ethanol refiners were still able to absorb the price because gas prices remained so high. But now gasoline prices have fallen by 50 percent, while the price of corn has only declined 19 percent, to $3.75 per bushel. Ethanol refiners say corn must reach $3.25 per bushel before they can make any money.
Chuck Woodside, CEO of KAAPA Ethanol and former president of the Renewable Fuels Association, says 2015 is looming as a critical year for ethanol. “We’re coming off a phenomenal 2014, and the industry as a whole did well,” he told the Kearney (Neb.) Hub newspaper. But “there are a lot of things yet to be determined about 2015.” Among them are how much drivers will increase their gasoline consumption (taking advantage of lower prices); whether more E15 and E85 pumps can be installed around the country; and whether the EPA will ever make up its mind on the Renewable Fuel Standard. There is even some question now of whether the EPA or Congress has the authority to set the RFS.
“The price of diesel has not fallen commensurate with the price of oil,” Woodside added. That only drives up the costs for ethanol plants, which use diesel-burning trucks and railroads to transport the product.
One bright spot has been the export market, in which American ethanol has been gaining ground. Demand has come particularly from Brazil, where 25 percent of all vehicles must run on 25 percent ethanol. Brazil has been under pressure to slow deforestation in the Amazon Basin, where most of its sugarcane ethanol is produced. China has also been a growing market for American ethanol products.
But refiners now agree that the best solution to the ethanol surplus would be to increase the number of pumps around the country that can dispense the E85 blend. That would produce a demand that would easily absorb all the ethanol American refiners could produce.