Last week, during our weekly radio show in West Texas, we received a call from a listener who asked if including ethanol in the gasoline supply was worth the fight between big oil and farmers. I hadn’t thought of this issue in those terms for quite a while, so I decided to dig back into this debate to see where this all stands and share my results with you in this week’s column. With that in mind, we decided to break down the question of, “Is it worth it?” into four parts: price benefits, reduction of chlorofluorocarbons (CFCs), oxygenate replacement and green fuel alternatives.
First, let’s set the stage by providing a little background. Most all gasoline blends include ethanol as an additive. As a matter of fact, according to the Energy Information Agency, the publications arm of the US Department of Energy, it is estimated that 95% of all 10% blended gasoline in the US contains ethanol. Ethanol was introduced in 2006, into the gasoline supply to replace a compound known as Methyl Tertiary Butyl Ether or MTBE. MTBE was the compound used as an oxygenate to replace lead in the gasoline. You may remember when unleaded gasoline made its debut in the late 1970s after the newly formed Environmental Protection Agency (EPA) decided too much carbon monoxide and soot was being released into the atmosphere.
Refiners needed an oxygenated compound to add to the unleaded gasoline blend to help reduce the smog and ground-level ozone, which was choking cities in highly populated or land-locked areas. In the early 1990s, the refineries used the ether products to meet initial EPA requirements. The seasonal use of an oxygenate in certain mandated areas began in 1992 with the addition of MTBE, an ether product. MTBE could be co-generated in the refining process so its inclusion made sense. Unfortunately, since MTBE is an ether derivative, one tablespoon can permanently pollute a million gallons of water. When refiners became aware of the environmental risks of using an ether product, they began looking for the next best alternative, and ethanol seemed to fit the bill. It was green, renewable and had the added benefit of reducing chlorofluorocarbons (CFCs) as well.
From a pricing standpoint, ethanol was traditionally thought of as a cheaper alternative than premium blends of gasoline. In other words, if the refiners decided to exclude ethanol and produce their own higher octane blends of gasoline, the higher octane blends would be significantly more expensive so, adding ethanol at the distributor level was much more cost effective for the refineries, distributors and the consumers. Even with the extremely confusing Renewable Identification Number, or RIN system, run by the EPA.
RIS’s, by the way, are attached to each gallon of a renewable biofuel, so the EPA can track their use. Unfortunately, their original intent was run over and a much more onerous and complicated process has taken over, allowing fraud costing the US Government and consumers billions of dollars.
As a price component of gasoline, it was assumed that the ethanol produced here in the US would be less expensive than the gasoline fraction it was replacing. Remember, ethanol was initially mandated to replace MTBE at about 6.75% blend. That blend would provide the beneficial green benefits of reduction of soot (SMOG), ground-level ozone and chlorofluorocarbons, and not add a potentially deadly ether compound back into the environment.
Unfortunately, lobbying being what it is, farm lobbies got involved and the EPA wrote the initial legislation to include up to a 10% blend of ethanol for each gallon of reformulated gasoline sold in the US. In terms of gallons, with the US consuming 143.4 billions of gasoline per year, the US would need to produce 14.34 billion gallons of ethanol to make up the 10% blend. This is why the ethanol industry exploded from 2004 through 2009. In 2004, the US produced 3.4 million gallons of ethanol for inclusion in the gasoline supply, as reported by the Renewable Fuels Association, and today ethanol production stands at 15.3 million gallons to meet growing gasoline demand, and the inclusion of E-85 blends of gasoline as well.
There are several negative issues bogging ethanol down, not the least of which is the price of a gallon of ethanol is right about the same price as RBOB gasoline. There’s virtually no price advantage, and there are no viable or economic replacements on the market currently for ethanol. See chart below:
Ethanol will never be a 100% replacement for gasoline because it is not as efficient as gasoline. Ethanol’s high octane rating, which means it helps today’s engines breath better while providing very necessary anti-knocking properties for higher performance engines, has a very important trade-off. That trade-off is that, while allowing the engine run more smoothly, it only provides two thirds of the energy that gasoline does. In other words, one gallon of ethanol produces the same energy as .66 gallons of gasoline. So, if your full tank of gasoline takes you 400 miles, a full tank of 100% ethanol would only take you 264 miles, or if you’re burning E-85 (85% ethanol – 15% gasoline blend) you would travel 351 miles. This math doesn’t work in ethanol’s favor but that’s not a bad thing, because ethanol should only be used as a component of gasoline and a replacement for MTBE.
Reduction of Chlorofluorocarbons
A very positive benefit to the inclusion of ethanol as an oxygenate in our gasoline is the fact that the gasoline blends including ethanol do not produce additional CFCs into the atmosphere, interfering with the ozone layer. CFCs are compounds used as propellants in aerosols, from products like hair spray, spray paints, and other products that need a propellant. In a study titled “A Life-Cycle Analysis of the Greenhouse Gas Emissions of Corn-Based Ethanol”, dated January 12, 2017, researchers concluded that the production of corn-based ethanol from a state-of-the-art natural gas-powered biorefinery would represent at least a 21% reduction in emissions from the energy equivalent quantity of an average gallon of gasoline. In other words, the inclusion of ethanol has a more beneficial effect on greenhouse gasses than does the gasoline alone blends. So, if there is no price benefit to including ethanol in the gasoline supply, it is, at least cleaner for the environment. This is why there is difficulty finding a replacement for corn-based ethanol.
The term oxygenate refers to a group of chemical compounds that are added to gasoline, because they contain oxygen in their chemical structure. Beginning in 1992, in an effort to reduce the noxious compounds from the air, the EPA began requiring the use of an oxygenate to help reduce the soot, carbon monoxide and ground-level ozone that was being released into the air. Apparently, unleaded gasoline by itself, does not burn sufficiently to remove these noxious compounds and they were released into the air as exhaust from a vehicle’s tailpipe. Now, there are two groups of compounds that are commonly used as oxygenates: alcohols and ethers. For our purposes here, we’re going to focus on the two most used compounds: Ethanol and MTBE.
To date, researchers have had difficulty finding suitable replacements for corn-based ethanol as an oxygenate. The EPA has a mandate that any fuel or additive must provide a reduction of the effects on greenhouse gasses while meeting the requirements of reducing soot, ground-level ozone and other noxious compounds from the gasoline blends being sold in the US. Scientists at the National Renewable Energy Laboratory (NREL) in Golden Colorado worked to find suitable replacements for corn-based ethanol and only came up with corn alternatives like tree bark, switch grass and a few more, but failed to help develop an alternative to the ethanol component of the gasoline blend.
Today, scientists continue to search for alternatives, for not only ethanol in the gasoline supply, but gasoline all together. As the political waves change, the green influence seems to be waning right now with the new administration putting pressure on the EPA to reduce onerous requirements on refineries and Corporate Average Fuel Economy (CAFE) standards imposed on vehicle manufacturers. While great work has been done by the vehicle manufacturers, the Obama Administration pushed hard for electric cars with new and expanding sources of electricity to power them. Unfortunately, batteries have not set a new standard, and only a small fraction of US vehicles are electric capable. I will say though that Tesla (TSLA), while an absolutely beautiful car, is too expensive and can’t get me around the ranch to take care of my cows! I know that’s a personal problem, but it’s one that hits small businesses all over the country.
Another problem exists with ethanol. It’s the fact that ethanol, cannot be blended at the refinery level or transported in the same pipeline system as the refined products. If ethanol were to be blended at the refinery, in a rail car, the gasoline and ethanol would separate during transport and not reconstitute. If ethanol was to be blended or even sent separately in the pipeline, a huge tar-like mess would develop and clog the pipeline. There is no easy fix for this since introducing ethanol, an alcohol, into a pipeline, works as a scrubber, depositing every molecule of residue it picks up, at the terminal end. Trust me, it isn’t pretty! Now, ethanol can only be transported by train or truck as a separate product adding to the cost of the ethanol.
What we discovered is this; corn-based ethanol is a valuable additive when needing to reduce noxious chemicals from the environment. It does not provide a cost benefit, and to date, there are no commercially available and economic alternatives to ethanol in the gasoline supply. As long as the producers of corn don’t get greedy and look to have the government mandate higher blends of ethanol in the gasoline supply like E-15, E-20 and E-30, there is a good balance in this market and there is no need to pick a fight with big oil. However, if farmers decide they want more, they may just awaken a sleeping giant!
By Tim Snyder
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If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com .