The Battle Over Ethanol Takes Shape

The decision isn’t scheduled until June but already opposing sides are converging on Washington, trying to pressure the Environmental Protection Agency over the 2014 Renewable Fuel Standard for ethanol.

Last week almost 100 members of the American Coalition for Ethanol descended on the nation’s capital for its annual “Biofuels Beltway March,” buttonholing 170 lawmakers and staffers from 45 states.  The object was to send a message to EPA Administrators Gina McCarthy to up the ante on how many billions of gallons the oil refining industry will be required to purchase this year.

The ethanol program is currently in turmoil.  The latest problem is rail bottlenecks that have slowed shipments and created supply shortages over the winter months.  Record-breaking cold and four-foot snow pack have been partly responsible but the rail lines are also becoming overcrowded.  With all that oil gushing down from the Bakken and Canadian crude now finding its way into tank cars as the Obama Administration postpones its decision over the Keystone Pipeline, ethanol is getting tangled in traffic.  .

“Ethanol for April delivery sold for about $3.02 a gallon on the Chico Board of Trade, an 81 percent increase over the low price during the past 12 months of $1.67 a gallon reached in November,” reported the Omaha World-Herald last Friday  “This weeks settlement price of $2.98 a gallon was the highest since July 2011.”  With only so much storage capacity, some ethanol refineries have been forced to shut down until the next train arrives to carry off the inventory.  As ethanol becomes mainstream, it is becoming more and more subject to market events beyond its control.

But the big decision will be EPA’s ruling in June.  In accord with the 2008 Renewable Fuel Act, Administrator McCarthy must set a “floor” for amount of ethanol refiners will have to incorporate into their blends during 2014.  The program ran into trouble last year when the 13.8 billion gallon requirement pushed ethanol beyond the 10 percent “blend wall” where the auto companies will not honor warrantees in older cars.  Refiners were forced to purchase compensating Renewable Identification Numbers (RINs), which exploded in value from pennies to $1.30 per gallon, forcing up the price of gasoline.  Contrary to expectations, gasoline consumption has actually declined over the last six years, from 142 billion gallons in 2008 to 134 billion in 2013 as a result of mileage improvements plus the lingering effects of the recession.  Last November McCarthy proposed reducing the 2014 from 14.4 billion gallons to 13 billion.  The industry has been crying “foul” ever since.

But there are other ways to fight back.  Last week in Crookson, gas stations were offering Minnesota drivers 85 cents off a gallon for filling up with E-85, the blend of 85 percent ethanol that many see as the real solution to the blend-wall problem.  “We want the public to understand there are different ratios of gasoline and ethanol and how they can save you money,” Greg LeBlac, of the Polk County Corn Growers, told the Fargo Valley News. 

At the annual meeting of the American Fuel and Petroleum Manufacturers (APFM) in Orlando last week, Anna Temple, product manager at WoodMac, made the case that the industry should forego efforts to raise the blend wall from 10 to 15 percent and instead shoot for the moon, leapfrogging all the way to E-85, where ethanol essentially replaces gasoline completely.  (The 15 percent only ensures starts in cold weather.)

“E-15 is a non-starter in terms of market share,” Temple told her audience, as reported by John Kingston’s in Platts.  http://blogs.platts.com/2014/03/25/eight-fillups/  She argued the incremental battle would absorb vast amounts of political capital yet still not be enough to absorb the 15-billion-gallon target for 2021.  Instead, Temple pointed to the growing fleet of flex-fuel vehicles that now numbers around 15 million, headed for 25 million in 2021 or 10 percent of the nation’s 250-million-car fleet.

“If U.S. drivers poured about 200,000 barrels-per-day of E-85 into their flex fuel cars in 2021, that would take care of about 17 percent of the scheduled ethanol mandate,” Temple said.  “It would only require that flex-fuel owners fill a 15-gallon tank eight times a year.”   The remainder would be absorbed in the 10 percent blend and ethanol producers would not have to cut output.

Platts’ Kingston checked the math and found that even this goal would leave ethanol consumption slightly above the blend wall at 10.5 percent.  “Still, the very modest number of eight fill-ups per flex fuel vehicles per year makes the whole blend wall issue seems a lot less daunting,” he confessed.

Of the 15 million people who own flex-fuel vehicles, of course, many don’t even realize it.  (The yellow gas cap or a rear-end decal are the giveaway.)  But the number of gas stations offering E-85 pumps is rising.  The Energy Information Administration now estimates the number at 2,500 with most of the growth taking place outside the Midwestern homeland.  California and New York each have more than 80 stations apiece.

The problem of rail bottlenecks can probably be solved by increasing the number of E-85 outlets and flex-fuel vehicles to bring supplies closer to the place of consumption.  Still, the industry would probably be happy to have a bigger renewable fuel mandate as well.

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