A Market of Contradictions: Ethanol Mandates, Motor Gasoline and the Blend Wall

Ethanol from corn as a motor gasoline blend stock seems like a good idea.  As an oxygenate it is supposed to clean up the air, and as a U.S grown renewable it reduces our dependence on fossil fuels and foreign oil.  The catch is that ethanol is being mandated under a morass of mind-numbingly complex government regulations, some of which conflict with each other, or worse yet are out of step with the realities of the market.  For example, the mandatory volumes of ethanol required may soon exceed the quantity that the market can use.  At the same time, high corn prices have driven margins on ethanol manufacture into the red forcing many ethanol producers to shutter their operation, reducing ethanol supplies.  And if that were not enough, a government program created something called the   renewable identification number – RIN – a 38-digit serial number that ‘tags’ batches of renewable fuels and has resulted in all sorts of complications.  Today we’ll begin an examination of the ethanol market to understand how we got in this predicament and where we go from here.  In Part I we tackle one of the most intractable problems – the Blend Wall.

Dad - What is Ethanol Made From?

Ethanol is 100 percent (200 percent “proof”) alcohol. Ethanol is produced by fermenting sugar in grain crops (e.g. corn) or fermenting sugar directly. To prevent ethanol production “escaping” into the adult beverage pool, producers add a small percentage of denaturant that makes you sick if you drink it. Fortunately denatured ethanol has other useful qualities including being an oxygenate. Oxygenates reduce the carbon monoxide created when gasoline burns. Oxygenates have therefore been blended into gasoline since the Clean Air Act amendments of 1992. Until 2004 methyl tertiary butyl ether (MTBE) was the principal oxygenate used in gasoline, but was regulated out of existence in the U.S. due to reported ground water contamination issues.  Since then ethanol has been oxygenate of choice for US gasoline.

Unfortunately while ethanol may be a useful oxygenate, it does not travel well when blended with gasoline. Ethanol attracts water in pipeline or storage facilities. That quality damages gasoline if ethanol is stored or moved through a pipeline when blended with gasoline. As a result, ethanol has to be shipped to gasoline pipeline terminals separately, usually by train or truck. Once at the terminal, ethanol is then blended into gasoline just prior to delivery to gas stations. This characteristic adds cost and logistic constraints to the use of ethanol blend gasoline.

Ethanol Mandates

We touched on ethanol mandates a few weeks back in “Ethanol, Gasoline and Refineries – Another One Bites the Dust”. The regulations are mind numbingly complex and require refiners and blenders to use byzantine administrative systems to track receipts and deliveries of the stuff. The ethanol mandates are also a living beast and continue to be updated by the Environmental Protection Agency (EPA) on a yearly basis.

A couple of years after ethanol began to be widely used as an oxygenate, growing concerns about US dependence on imported oil and the political clout of the corn lobby, led to the Energy Policy Act of 2005 and the 2007 Energy Independence and Security Act (EISA) that both mandated increased use of renewable fuel in place of gasoline. By renewable fuel, the legislation principally refers to ethanol produced from corn but also covers biodiesel, cellulose biofuel (ethanol produced using crops other than corn), and advanced biofuel. For the time being, we are restricting our discussion to the corn based ethanol rules.

The EISA contains a mandate for a renewable fuel standard (RFS). Under the RFS refiners are required to sell specific volumetric target quantities of renewable fuels each year. These volumetric targets increase from 26 MB/d in 2006 to 2.35 MMB/d in 2022. Each year the EPA estimates gasoline and diesel consumption ahead of time and then sets percentage targets for renewable fuels for refiners to blend into gasoline .The 2012 target for corn ethanol blended into gasoline is 861 MB/d or 9.23 percent of estimated gasoline sales by volume. Under the rules, the percentage of ethanol blended into gasoline will continue to increase each year as required to meet the growing volumetric ethanol targets.

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