As the Iowa caucuses shape up for February, one thing is becoming clear: Support for ethanol is no longer a sine qua non for aspiring presidential candidates.
Perhaps the EPA’s proposal to modify the Renewable Fuel Standard led advocates on both sides of the dialogue to intellectually and emotionally wrestle with each other. Perhaps the apparent, albeit modest, growth of E85 stations and sales in the nation brought the supporters of E85 – corn growers, some environmentalists, and the detractors (primarily the oil industry and, again, some environmentalists) – out of the proverbial closet. Perhaps recent studies concerning the impact of E85 on GHG emissions – studies that, for the most part, suggest that using E85, when compared to gasoline or on its own, is a net plus in terms of reducing GHG emissions and several other pollutants – provided fodder for both proponents and opponents to take off the gloves.
Here’s what we know, or what we think we know: On balance, most government agencies that have been assigned to, or have assumed, the responsibility for measuring the overall impact of E85 on GHG emissions and pollutants, in addition to many independent think tanks (including universities), grant E85 positive marks, either on its own or as a fuel or when compared to gasoline. But the conclusions, to some doubters, are not conclusive. Ideologues or special interests aside, a handful of independent analysts working for reputable groups challenge the high marks granted to E85. The repartee is, at most times, more gentle and academically correct than that between intense E85 advocates and detractors. But the differences of views, while suggesting a clear tilt toward increasing the use of E85, should be discussed and responded to if consumers are to be easily convinced to make the switch from gasoline.
Let’s begin with the Argonne National Laboratory, a highly respected national research lab. It indicated late last year that its GREET (Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation) Model estimated that the life cycle of GHG emissions from E10 (regular gasoline) was 439 grams per mile, and from corn-based E85, 341 grams per mile. Quite a difference! At relatively the same time, the Department of Energy indicated: “As with conventional fuels, the use and storage of ethanol blends can result in emissions of regulated pollutants, toxic chemicals, and greenhouse gases. However, when compared to gasoline, the use of high-level ethanol blends, such as E85, generally result in lower emissions levels. … Using ethanol as a vehicle fuel has measurable GHG emissions benefits compared with using gasoline. Carbon dioxide released when ethanol is used in vehicles is offset by the CO2 captured when crops used to make the ethanol are grown. As a result, FFVs [flex-fuel vehicles] running on ethanol produce less net CO2 than conventional vehicles per mile traveled.”
That’s a pretty strong statement!
The Congressional Budget Office’s recent estimates are a bit less enthusiastic. They are hedged with the institution’s usual and understandable caution, given its primary role in estimating alternate budgetary impacts of alternative policies. CBO’s June 2014 report on the RFS states: “Available evidence suggests that using corn ethanol in place of gasoline has only limited potential to reduce greenhouse gas emissions (and some researchers estimate that it could actually increase emissions).” A NASA sensor used by the Goddard Space Flight Center to test air quality above one ethanol refinery led to an obviously tentative and preliminary conclusion that ethanol refineries in the nation “could be releasing much larger amounts of ozone-forming compounds into the atmosphere than current assessments suggest.”
So what’s a guy to do (“guy” being a euphemism for both men and women)? First, understand that the enemy of the good is, indeed, often the perfect. Two, borrow and slightly amend Ambassador Abba Eban’s comments concerning securing peace in the Middle East: Let’s never miss an opportunity and subsequently miss an opportunity. After reviewing the non-advocacy literature, it seems clear that E85 has become a reasonable alternative to gasoline at the present time. It is not perfect. But it is perfectible to be sure and, indeed, it is being perfected both in the laboratory and from the production process through distribution to use in automobiles. Clearly, with respect to tailpipe emissions, E85 is now much better than gasoline.
Further, solid studies, like those from the Argonne National Laboratory, show that ethanol’s life cycle emission benefits are improving and are superior to gasoline. In this context, farmers are learning to better manage and increase efficiency in the growing of corn, thus reducing emissions related to land use. Several states, led by Colorado, now impose regulations that cut methane leakage in the supply chain. Alternative feedstocks (e.g., corn stover, cellulosic, natural gas, etc.) are on the horizon and offer the promise of an E85 that will be cheaper and result in significantly less emissions. Consumers will likely soon have choices among E85 feedstocks. This is good for the country. It will take place while electric and hydrogen vehicles improve their readiness for prime time and reach out to a larger share of the American market.
So visit your local, accessible, less-expensive, generally nice E85 fuel station and get rid of your addiction to oil and gasoline. Try E85! You will like it! While your humanity is being redeemed, urge key research agencies and think tanks to get together and work out their differences, something like the Manhattan Project. Agreeing on the value of alternative fuels in reducing emissions could well be as important in light of the specter of global warming and the increase of pollution as the invention of the atomic bomb.
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.
June 1 will mark the day when the Environmental Protection Agency finally gets around to issuing its new requirements for the Renewable Fuel Standards Act, after a delay of more than two years.
The EPA found itself between a rock and a hard place in 2013, when declining gasoline consumption pushed the ethanol production value specified by the 2006 act over the “blend wall” — the 10 percent mark at which ethanol mixture allegedly surpasses the 10 percent threshold for E10 blended gasoline. This can be a problem, because higher concentrations of ethanol are only approved in relatively newer vehicles.
The EPA punted in 2013, then again last year. Now at least the EPA seems ready to resume its responsibilities. The agency sent its proposal over to the White House Office of Budget and Management earlier this month, but no word has leaked out. The June 1 proposals will not be finalized until November.
Some biofuels producers argue that the agency should push past the 10 percent blend wall. The EPA has already approved E15 — a blend of up to 15 percent ethanol — for light duty vehicles, including trucks, SUVs and cars, made in model year 2001 and since then. Flex-fuel vehicles can also tolerate blends of up to E85. But there are questions about whether some older vehicles built before 2001 could potentially be harmed by higher blends. Automakers have threatened to void warranties for these cars if they use ethanol blends higher than E10.
The oil industry, which opposes raising the RFS, argues that the infrastructure for distributing blends higher than E10 does not exist and would be very expensive to put into place. Outfitting a gas station with E15 and E85 pumps brings added cost. Since 95 percent of gas stations are owned by independent operators, the chances that they will make this investment are very slim. Oil company and gas station operators say it is the biofuels industry that should make this investment. No one has been able to resolve this stalemate.
The EPA’s decision will come at a time when things are looking up for the biofuels industry. The Energy Information Administration recently announced that biofuel production hit 14.3 billion gallons last year, the highest output ever. Moreover, this increased production has been driven by new technologies. “If ethanol plant yields per bushel of corn in 2014 had remained at 1997 levels, the ethanol industry would have needed to grind an additional 343 million bushels, or 7% more corn,” reports Energy Global.
“To supply this incremental quantity of corn without withdrawing bushels from other uses would have required 2.2 million additional acres of corn to be cultivated, an area roughly equivalent to half the land area of New Jersey.”
Improvements in ethanol’s productivity have come from:
1) Larger-scale operations that have allowed better process technology such as finer grinding of corn to increase starch conversion
2) Better temperature of fermentation, which optimizes productivity
3) Better enzymes and yeast strains used in the process
Much of this extra production has been absorbed by revving up exports. U.S. ethanol exports reached an all-time peak of 1.087 billion gallons in 2011-2012, then slumped to 554 million gallons in 2012-2013 but bounced back to 792 million gallons in 2013-2014. This year exports are once again up 9 percent and may approach the 2011-2012 record.
Canada is our largest export target, but most of the ups and downs depend on what is happening in Brazil. That country has a mandate of 27 percent ethanol — mostly from sugar cane — but high sugar prices have cut into Brazilian production, and 70 refineries have gone out of business. Therefore Brazil has become more dependent on American corn ethanol to fulfill the requirements. As a result, the U.S. has been a net exporter of biofuels for the last five years.
Ethanol producers are also making progress in making the higher blends more recognizable and acceptable to motorists. American Ethanol just celebrated a five-year partnership with NASCAR that resulted in the circuit’s race cars running on E15.
“This has been a tremendous partnership,” Tom Buis, CEO of Growth Energy, told AgriNews. “We are thrilled to help NASCAR in its green efforts and NASCAR’s high-performance racing has been the perfect validator for E15, a cleaner burning fuel that is less expensive and has a higher octane content, which improves performance.”
Biofuels advocates claim the use of E15 has reduced greenhouse gas emissions by 20 percent over the 7 million miles traveled by the race cars in the last five years.
In Rensselaer, Indiana, the Iroquois BioEnergy Co. has opened a retail gas station that will offer ethanol blends E10, E15, E30 and E85. The station was partially funded by an Indiana Corn Marketing Council Flex Fuel Infrastructure grant.
“We want to use this pump to show the public the economic advantages of higher ethanol blends,” said Gunner Greene of Iroquois BioEnergy. “Our intent is to target those with flex-fuel vehicles who may not have a thorough understanding of the advantages of those vehicles.” The company was surprised to discover that 75 percent of its initial sales were for E85, with E30 coming in second place. They did not expect the demand for the higher blends to be so solid. The Corn Marketing Council has plans to fund 16 more flex-fuel stations around the state.
If the EPA approves the use of E30 and higher blends for nearly all cars, the country will probably be able to absorb the industry’s higher output. If not, exports may still pick up the slack. Either way, the ethanol industry is in much better shape than is commonly credited.
Biofuels have been taking their lumps lately. After almost seven years of controversy, the European Parliament has acted to limit the amount of biofuels that can be garnered from land that could be used to grow food.
The EU has set itself a goal of getting 10 percent of its transport fuel from biofuels by 2020. Last week the Parliament voted to reduce this to 7 percent. The concern is that biofuels are taking food out of people’s mouths. Biofuels are also accused of leading to deforestation, both in Europe and in countries such as Brazil and Argentina, where Amazon rainforest and Argentinian pampas are being put under cultivation for growing biofuels for export.
“Let no one be in doubt, the biofuels bubble has burst,” Robbie Blake of Friends of the Earth Europe said in a statement. “These fuels do more harm than good for people, the environment and the climate. The EU’s long-awaited move to put the brakes on biofuels is a clear signal to the rest of the world that this is a false solution to the climate crisis. This must spark the end of burning food for fuel.”
Ironically, it was soft-energy guru Amory Lovins, who at the time was British representative of Friends of the Earth, who originally suggested the biofuels idea in his 1976 book, Soft Energy Paths. Lovins used an elaborate comparison with the beer and wine industry to show that it would be possible to produce a good one-third of the United States’ gasoline requirements through biofuels. Unfortunately, Lovins did not take account of the amount of land that would be required to grow these crops. This oversight has dogged the biofuels effort ever since.
In the U.S., criticism is mounting as well. A study published last month by researchers at the University of Wisconsin-Madison shows that corn and soy crops for biofuels are expanding into previously un-farmed prairie land in the Midwest. Using high-resolution satellite photographs, the authors identified the expansion of cropland from 2008 to 2012, the four years following the passage of the Renewable Fuels Act that mandated the use of biofuels. The authors estimate that 40 percent of the corn crop grown in the U.S. is now used to make ethanol for use in vehicles. Ironically, environmentalists who originally celebrated ethanol are among its biggest detractors.
So does this mean that American biofuels will soon be facing the same limitations they’ve encountered in Europe? Probably not. The reason, once again, is technology.
From the beginning, the dream of biofuels enthusiasts has been that ways could be found for breaking down the refractory cellulose molecule and turning it into basic sugars that can be synthesized into ethanol. This is a very difficult task. It can only be accomplished in two ways: 1) heating corn stover and other cellulosic materials to a very high temperature, which consumes more energy than is produced; and 2) taking advantage of bacteria in the guts of cows and termites that can break down cellulose. These bacteria are highly temperamental, however, and have proved to be extremely difficult to cultivate on a commercial scale.
Nevertheless, progress has been made, and there are several commercial operations now approaching successful operations. Among them are:
• Abengoa Bioenergy (Hugoton, Kansas). This Spanish company’s cellulosic-ethanol facility came online in 2014 and is expected to produce 25 million gallons per year from corn stover, wheat straw, milo stubble and switchgrass.
• DuPont (Nevada, Iowa). Its 30 million-gallon-per-year cellulosic plant is scheduled to begin production this year. The plant will get corn stover from 500 farmers who are participating in the company’s Feedstock Harvest Program.
• Poet-DSM Advanced Biofuels (Emmetsburg, Iowa). Co-funded by a Dutch company, Project Liberty opened in September 2014 and is producing ethanol from corn cobs, leaves, husk and stalk. It is shooting for 25 MMGY.
• Quad County Corn Processors (Galva, Iowa) started production last year. Its Quad County facility can produce 2MMGY. The company says its patented technology has the ability to generate 1 billion gallons per year, without consuming any more corn, by adding bolt-on technology to existing corn-ethanol refineries.
So ethanol is not standing still. The EPA is expected to issue its renewable fuel standard sometime next month, after dodging the issue for two years. The threshold likely will be below the 14 billion gallons that was originally scheduled for 2014. But the law’s requirement for Gen-2 biofuels has barely been scratched, since these cellulose efforts have not borne fruit to date. With cellulosic operations now gearing up, it appears that ethanol may be ready to take on a second life.
(Photo: Corn-stover harvest. Posted to Flickr by Idaho National Laboratory)
Former Gov. Richard Lamm of Colorado and I once led a group of CEOs on a trip to London. It was focused on what Colorado could learn from the British healthcare system. During the trip we visited St. Elizabeth Hospital. There in the lobby was a stuffed, mummified body of Sir Jeremy Bentham, so I took a picture with him. He was not very talkative.
But the resulting photograph brings back memories, perhaps apropos to the oil industry. Seeing Bentham looking so well and remembering how much he meant to my life — both the pain and joy — I propose we bring back Adam Smith, and place him in the lobbies of the big oil companies. Why? Easy: they seem to have forgotten about the value of free markets, competition and capitalism. A little dose of recall and guilt every morning when they go to work and when they leave their offices every evening wouldn’t hurt. Over time, maybe there would be substance behind their luncheon or dinner speeches concerning free markets and capitalism. Maybe they would remember Smith’s warning that, “People of the same trade [in this case, the oil industry] seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Right on, Adam! You are not my favorite economist or ethicist, but your quotation appears to fit the behavior of the oil industry. Sen. Dianne Feinstein, during California’s increase in gas prices a couple of years ago, suggested that oil companies and investors might have tried to set prices and blur their actions by casting blame on the refinery fires for gas price spikes. Her view was that market variations alone did not explain the high prices consumers were paying at the pump. Her comments implied some sort of collusion or manipulation.
The general behavior of the big five oil companies concerning competition from E85 lends credence to Feinstein’s suspicions. Listen, my reader, and you shall hear some examples of big oil’s apparent, sometimes seemingly coordinated, efforts to restrict the growth of E85 sales here (sorry, Longfellow), even though E85, at the time, posed no real immediate competitive threat to overall gasoline sales. Of the just over 150,000 retail fuel or gas stations in the nation, only 2.5 percent offer E85 and less than one half of one percent of the major brands provide E85 under their branded canopy. How nice of them! Read a franchise agreement from Exxon or Texaco, and see if you can find a provision for an E85 pump…maybe there are words suggesting a location in the back of the station, near the men’s or ladies’ room or in front of the station, clearly off center and not under the canopy.
Look hard at the language and the decisions of nationally branded retail stations. Franchisees are generally limited as to price, fuels, location of pumps and marketing strategies. Maybe these restrictions are legal and from a monetary and profit point of view, understandable. But from a consumer perspective, they limit choice and often frustrate competition.
Some have charged oil companies with price fixing or collaboration in setting prices (a nicer way to say fixing). “No, not in America,” you say? Adam Smith would turn over in his grave! According to a report by AJW company in 2014, “Since RIN prices began to rise in 2013, the nationwide average discount for E85 vs. E10 at independent stations has been 14 percent or greater for all but one month. During the same period, the nationwide average discount for E85 at major branded stations reached 14percent only once. This discount is only a price comparison and does not factor in relative energy content of the fuels. As long as there is limited availability and unattractive pricing at major branded stations, low E85 demand likely will persist among consumers using those stations.”
Generally, I am not a fan of special-interest group research or funded research. I prefer to rely on, at least, relatively independent think tanks, universities and scholars. Yet, recently gifts of money for research blurs the line between the interest of funders and the integrity of the word independent. Caveat emptor!
A 2014 case study by the Renewable Fuels Association (RFA), an advocacy group funded, in part, by self-interested donors, tracked the per gallon fuel costs of all nine retail stations selling E85 in St. Louis during the summer of 2014. Each station had the brand names of one of the five largest oil companies.
The data indicated that there is some support for the notion that gasoline producers/suppliers and their franchised retailers in at least St. Louis purposely employed pricing strategies to discourage E85 consumption. They, apparently, wanted to negatively influence the consumer perceptions about the fuel.
Oil companies appeared to control key price behavior at the nine stations and, to some extent, worked together to set prices, either formally or informally. RFA argues that it’s hard to believe that the price similarities at stations in St. Louis happened by chance. For example, the average E10 retail prices were $3.45 dollars per gallon while the average E85 retail price was $3.47 dollars per gallon. Wholesale prices of E85 were an average of $2.58 per gallon, while E10 averaged $2.93 per gallon. “Based on prices for locally available ethanol, hydrocarbon blend stock, RFS RIN credits and a typical markup, E85 could have been offered at retail for $2.44-2.55 dollars per gallon.” There probably are many reasons why average E85 prices were more expensive than E10 and almost one dollar larger than their wholesale price….like someone from outer space tampered with the pumps or consumer demand for E85 overwhelmed supply and the stations responding to market pressures raised the E85 price to mute interest from buyers. Neither, of course, was true!
Oil companies and their retailers appeared to set the price of ethanol to steer E85 and fuel-agnostic buyers to gasoline. They also wanted to keep the loyalty of gasoline buyers. The similarity of prices could have occurred by chance. Sometimes, I wear a blue shirt in the morning and so does my colleague. We never discussed what we would wear. But our color schemes are coordinated. What the study doesn’t answer is why other St. Louis stations, independent from national brands, did not see an opportunity to come in below the prices of majors and sell E85. Personally, I would have liked the analysis better if other cities were included as cases for comparison and if the time period went beyond the summer. But it was an interesting provocative report and you can’t have everything.
Anecdotes and studies based on the relatively recent California methanol fuel experience and Colorado’s effort to build E85 sales seem to support the RFA study. They suggest that the fear of competition from alternative fuels among oil companies and or retailors led to, at best, begrudging support for both methanol and ethanol. They often located pumps (if they agreed to have them at all) in unfavorable positions in their or their franchisee’s retail stations. Marketing strategies were marginal at best, and non-existent at worst. Stories from some astute observers suggest that relatively high methanol and E85 prices were put in place to detour customers to gasoline. Among other factors leading to problems with each state’s initiatives, there was a lack of sustained interest by major oil companies in building and sustaining sales of both alternative fuels with competitive pricing.
Maybe things will change. The present downturn in oil and gasoline prices has led some oil company leaders to think more charitably about alternative fuels —natural gas, ethanol, methanol, biofuels — particularly in light of the development of more flex-fuel cars coming from Detroit, and from consumers who convert their older cars to be flex-fuel vehicles. They have begun to view alternative fuels more favorably as part of their future business and strategic plans. If they go further, they will have to face questions, which include: whether they integrate gasoline and alternative fuels under one organization and canopy or separate both, perhaps, as different brands. Real competition, probably, will require Congress to consider some variations on a theme of open fuels legislation. Success in building competition at the pump would make Adam Smith happy, were he alive, and be good for the environment, the economy and consumers.
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.