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Why The Midwest Should Protect The Ethanol Market

Robert Rapier

Today I want to conclude the recent series of articles on ethanol. Previous articles in this series were:

To recap, the ethanol industry has been hit hard since President Trump’s inauguration, as I warned it probably would be shortly after he was sworn in. Today’s ethanol industry is essentially a product of the Renewable Fuel Standard (RFS) which was created in 2005. The ethanol industry has been dependent since then on continued federal support of the RFS for its markets.

But there are powerful interests on both sides of this argument, which puts the ethanol industry in a position of perpetually lobbying for continued federal support. This support has weakened during the Trump Administration, as the Environmental Protection Agency (EPA) — which administers the program — has granted hardship waivers to many small refineries.

These hardship clauses are meant to protect small refineries that process less than 75,000 barrels of oil per day from “disproportionate economic hardship” under the RFS. These waivers save the refiner money, but also lower the value of the credits refiners must pay to comply with the mandate. That, in turn, weakens the ethanol mandate, which hurts the ethanol industry.

My proposed solution is for the Midwestern states to band together to provide sufficient state incentives to develop a major Midwest corridor where E85 — a blend of 85 percent ethanol and 15 percent gasoline — is the primary fuel of choice for consumers. There is enough potential demand in the Midwest to consume nearly five times current U.S. ethanol production. This would shift control of ethanol demand from federal government decrees — where support is mixed — to the state governments that strongly benefit from the ethanol industry. (I have actually proposed such a solution for about a decade).

I received a tremendous amount of mostly positive feedback in response to the recent ethanol columns. There were two consistent objections raised, which I will address.

Objection 1: Not Enough Flex Fuel Vehicles

The first was that there aren’t enough flex-fuel vehicles (FFVs) on the roads to consume that much E85. While it is true that more would have to be eventually built, there are far more E85 vehicles on the roads today — predominantly in the Midwest — than there is demand for E85.

In 2017, there were more than 22 million FFVs on the roads. That represents nearly 10 percent of the entire automobile fleet. In 2018, General Motors had the most FFVs with 13 models. Ford followed with 11, and Fiat Chrysler had seven.

Plus, according to Renewable Fuels Association (RFA) Vice President of Industry Relations Robert White, “There are more than 4,000 retail stations throughout the U.S. that offer E85 or other ethanol flex fuel blends, and that number grows each week.”

Thus, the E85 infrastructure is there, and there are plenty of E85 vehicles on the roads to begin growing E85 demand.

Further, vehicle manufacturers respond to demand. If they see E85 demand rising, they will build more FFVs to respond to that demand. This simply isn’t an issue, at least certainly not until the FFVs that are already on the roads begin to consume the E85 they were designed for.

An acquaintance from Iowa told me that many users balk at the lower gas mileage they get from E85. This means they have to fuel up more often. That’s a key reason that the E85 price needs to be cheaper than the price of gasoline on a per mile basis. If drivers are inconvenienced, they want to save money for their trouble. My plan is targeted at that point.

Objection 2: Ethanol Needed for Octane

The second objection was that a plan to increase E85 demand in the Midwest is unnecessary because refiners across the country need ethanol to boost the octane of gasoline.

There are multiple problems with this argument. The first is that if refiners really need ethanol for octane, then they will use it. Refiners are in the business of making money, and if the RFS was not in place they would evaluate ethanol as an octane-boosting option in the same way they would evaluate other options.

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Keep in mind that refiners must also buy the oil they refine. If the economics favor ethanol, they are going to buy as much ethanol as they can. Arguing that ethanol is needed for octane actually undercuts the need for the RFS, because if that were true refiners are going to use it regardless.

However, speaking as someone who spent several years blending gasoline, it would take far less than the current mandated RFS ethanol volumes for refiners to meet their octane requirements. Some refiners would absolutely opt to use ethanol to boost octane, but others would make other choices.

What are those choices? Consider that refiners have the following options for boosting octane. I will address some objections to these components below, which are listed with their typical blended octane ratings. Most of these ratings are exactly those shown at the RFA website , which cites the Department of Energy as the source:

  • Methanol — 117
  • Ethanol — 114
  • Xylene — 107
  • Toluene — 104
  • Reformate — 100
  • Alkylate — 95
  • Butane — 93

For reference , nearly 90 percent of all gasoline sold is regular, which has an octane rating of 87. Most refiners can easily meet that mark without any need for additional blending components. (Note that using higher octane blends in an engine designed for regular is a complete waste of money , as it does not improve your gas mileage).

From this list, refiners can produce reformate and alkylate, and butane is a frequent refining byproduct, or can be bought cheaply. However, butane has a much higher vapor pressure than other gasoline blending components. Since gasoline blends are limited by vapor pressure, butane blending is usually limited to about 2 percent in the summer and about 10 percent in the winter when higher vapor pressure blends are allowed.

In an unconstrained market, refiners could buy methanol, ethanol, xylene, or toluene to boost octane as needed for higher octane blends. However, they are also capable of producing all the components they need to meet even the highest octane requirements of premium blends (91-94).

Note that two of those components — xylene and toluene — are aromatics. Further, reformate that is produced in a refinery catalytic cracker will contain aromatics. There has been a push to lower or remove the use of aromatics in gasoline, some of which are known carcinogens.

Let’s take that argument at face value. That would remove xylene and toluene from the potential list of blending components. Further, it would require that the aromatics be removed from reformate, but that would still leave a high-octane blendstock. These aromatics are already removed in some refineries, as they are valuable feedstocks for petrochemical processes. Citing a study commissioned by the Department of Energy:

Petrochemical plants consume refinery and NGL [natural gas liquids] plant products, and produce intermediate and finished petrochemical products. Thus petrochemical facilities “compete” with refineries for certain feedstocks and intermediate products, some of which are highly desirable gasoline blendstocks. The primary intermediate petrochemical products are aromatics and olefins. Aromatics (benzene, toluene, and xylene [BTX]) are used to make a wide variety of consumer products, from dyes and detergents to synthetic fibers. BTX is recovered from reformate. Toluene and xylene have excellent gasoline blending characteristics (high octane, low RVP) and the petrochemical and gasoline markets compete for these products.”

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Thus, the argument against aromatics can’t be used as a justification for using ethanol to boost octane, as there are other tools available to refiners.

Regarding methanol, it is one of the cheapest options that refiners could use. Ethanol interests often object to methanol on the basis of its toxicity. There are many problems with the toxicity argument. Ethanol is also made toxic before it leaves the ethanol distillery so people won’t drink it. Of course, gasoline itself is highly toxic as well. The fact is, our motor fuels are toxic – and flammable. Therefore, they are dangerous and we have to use them with an appropriate degree of caution.

I have even seen some raise the potential for methanol contamination to the environment. I will note that the windshield washer fluid that you can buy for a buck or two at the store contains large amounts of methanol. We inject these directly into the environment, but they don’t persist because microbes rapidly metabolize ethanol. Methanol simply can’t persist for long in the environment.

The bottom line regarding the octane argument is refiners have numerous options for boosting octane. If the RFS wasn’t in place, they would make decisions based on the most favorable economics. That might mean building or expanding an alkylate unit. That’s not a hypothetical, as alkylate capacity has been steadily increasing over time. If the demand was there and the economics justified it, capacity could expand much faster:

U.S. alkylate production capacity.

Alternatively, a refiner might invest in distillation to remove aromatics from reformate, or they could buy ethanol or methanol. They might buy their own ethanol plants, as Valero did.

But refiners that are forced to blend 10 percent ethanol must sometimes operate the rest of the refinery in a suboptimal fashion to produce lower-octane blending components so they end up with the appropriate octane in the finished gasoline. Without the RFS, refiners would change how they operate, and the demand for ethanol as an octane booster would certainly fall.

Thus, the octane arguments fail miserably as an objection to my Midwest ethanol plan.

Conclusions

As I worked on this series, President Trump reportedly intervened in the latest dispute between the ethanol industry and oil refiners. The President gave the EPA the green light to grant exemptions to 31 small refineries, relieving them of the requirement to blend ethanol. The ethanol industry was outraged by this decision, but it underscores the argument I have been making. An industry that lives by federal mandate can die by federal mandate.

It is time to get the federal government out of this business. Midwestern ethanol states must band together to create and protect their own ethanol markets.

By Robert Rapier

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