I have seen the question frequently arise as to whether the ethanol blending mandate is based on rigid numbers (e.g., 9 billion gallons in 2008) or whether it is actually a percentage requirement, and the number is an estimate based on projected gasoline sales. In other words, let’s say that hypothetically gasoline sales this year are only half the level of last year. Is the mandate still for 9 billion gallons, or does it drop to 4.5 billion gallons?
Also, I saw someone recently make the charge that refiners are underblending ethanol, and are likely to end the year in violation of the mandate. So, I also sought some clarification around this issue. I contacted Peter Gross at the EIA, who seemed to be their expert in this area. He was kind enough to reply, and clarified both issues:
9 billion gallons (and future levels) are mandated and not based on projected total gasoline sales. The scenario you mention of gasoline sales falling way off (10% at most maybe from last year), would still put the total motor gasoline consumption at more than 130 billion gallons (which includes the 9 billion gallons of ethanol) for the year. Thus, there is plenty of gasoline around even in this extreme case to absorb the ethanol and still not saturate the E10 market. In fact, 9 billion gallons of ethanol means 90 billion gallons of E10 which leaves over 40 billion gallons of conventional gasoline without ethanol.
The immediate problem is not that there will be enough gasoline to absorb the ethanol in 2008, 2009, and probably 2010; in these years the questions are “Is there enough infrastructure to send the ethanol to (and blend with gasoline in) as-of-yet untapped regions, esp. the southeast?” or “Will mounting political pressure over food/grain costs force the EPA to lower the mandate?” (witness Texas’s recent waiver application).
After 2011 EIA projects there will not be enough gasoline sold to absorb the ethanol as E10; then the big question becomes how does the U.S. absorb the excess; as E85? (currently the only legal option) or as E15/E20? (as of yet not fully tested). Can the EPA lower the mandate if the E85 infrastructure is inadequate or too costly and the E15/E20 option is not available? Yes, but again this probably would not happen until after the “blend wall” (i.e., saturated E10 market) has occurred.
All obligated parties (refiners and importers of refined fuel products) must satisfy their “renewable volume obligation” (RVO) which is essentially their share (based on how much fuel they produce or import) of the total renewable fuel that must be used (this year 9.0 billion gallons). Volumes of blended renewable fuel are assigned RINs (renewable identification numbers). If a particular party cannot blend their share, they may buy these RINs from parties that have over complied on their RVO (though some alternatives exist such as carrying a RIN deficit for one year or using one’s own excess RINs from the previous year). In any case, every year every obligated party is required to document its RINs and show that they have the same or more than their RVO to the EPA. If they don’t, they can carry a deficit as mentioned earlier or they will be penalized by the EPA.
Peter Gross
EIA, DOE
202-586-8822
To summarize, the ethanol mandate is based on a fixed number. Further, refiners can technically underblend, but they must make up for it by either buying credits from parties who overblend, or by carrying a deficit that they have to make up – or suffer penalties. Thus, they can underblend and not be in violation of the mandate, because there are provisions for that. If they don’t meet those provisions, they are in violation and are penalized.
Do refiners blend? I thoguht blending was done further downstream, at the distribution terminal.
There is huge incentive to overblend since ethanol is almost 70 cents cheaper than unleaded on a volume basis (and volume is all that matters up to E10). Plus you can sell your RINs to underblenders. So who are the underblenders? Those who can’t get ethanol due to transport bottlenecks.
I’m surprised to hear the southeast has trouble. I always figured it was the west. Surely it’s easier to move ethanol from the corn belt to Georgia than to California? Kind of strange. Anyway, thanks for an informative column.
Robert —
Question about ethanol blended gasoline…are new cars engineered to use the 10% ethanol blended gasoline more efficiently than old cars seem to be?
Last week I drove my ’98 Civic on a week-long road trip. Typically, using Illinois and Indiana ethanol blended gas, I get about 33-34 mpg on the highway (which is just sad for a Civic). However, when I got to South Dakota and filled up with non-ethanol blended gasoline, my mpg shot up to over 40 on the highway. Despite the fact that I was going 10 mph faster (75 speed limit versus 65) and dealing with the mountains. I maintained that average until I got back into Kansas, where I was once again forced to fill up with an ethanol blend and I went back down to my 34 mpg average.
So do new cars do any better?
OT but..
RR can you post on Gore’s call to eliminate oil consumption by 2018…and the *unrelated) huge drop in crude pirces in last three years…
I meant to say last three days…
On a trip to Houston a few months ago I filled our minivan from a pump conspicuously labeld 10% ethanol. My MPG dropped from 24 I usually get on the highway to 22.
But these anecdotal results don’t really make sense. Even with W10 your MPG should only drop 10% (i.e. 40 to 36). Controlled tests show E10 reducing MPG by a couple percent, which is impossible to measure in normal driving.
Besides, how did you find non-E10 gas in South Dakota? Florida or some western states I might understand, but anywhere within 750 miles of the corn belt is pretty much full E10. The economics are too advantageous for blenders, if they can get their hands on the ethanol.
Benny – a question for you. Who do you think said this?
If you want to know the truth about gasoline prices, here it is: the exploding demand for oil, especially in places like China, is overwhelming the rate of new discoveries by so much that oil prices are almost certain to continue upward over time no matter what the oil companies promise.
Andy Revkin – a big greenie, has posted an annotated version of the Al Gore speech. Even he is skeptical of some of the claims:
The Annotated Al Gore Climate Speech
The answer to my earlier question is “erog la” backwards. And I thought the truth was greedy, evil oil companies and their profits. Go figure.
Kingofkaty-
Not sound reasoning, probably written by an amateur.
1. The oil companies are not important anymore, it is sovereign “nations” (thug states) that control the world’s supply.
2. The price of no commodity can simply keep rising forever. Demand gets choked off at some point.
I was just surprised that Gore blamed higher prices on increased demand and not the Democrat’s “usual suspects”.
Would agree that higher oil prices have become a state policy. States like Venezuela, Mexico, and Nigeria are diverting more of the lagresse to corruption and social programs instead of reinvesting in production. Lack of any spare capacity in the system is keeping prices high.
Oil down $16 per barrel in the last three days. It’s Abbot and Costello time again folks. Any moment now,Chavez will threaten to cut supplies to the imperialist warmongering yankee dogs. Or,Ahwannajihad will threaten to wipe Israel off the map again. Or both. Speculators will make like Pavlovian rats and oil will hit new records. Works every time.
Maury-
Maybe not. I think the bull run (a speculative run) has run into medium-term price elasticity.
By that I mean, the short-term demand for oil is inelestic. If speculators push the price up, you and I still have to buy. People say it is the market doing it.
In the medium-term, you and I (and millions, billions of other oil buyers) start to make adjustments. Instead of power-boating every weekend, maybe just two times a month etc. Carpooling etc.
I think we are at this stage now. Speculators are running up against declining demand.
Stage 3 is coming, when you and I buy new smaller cars, move closer to work, carpool, buy a scooter etc. Our demand keeps going down, and it stays down. The speculators lose control.
Interestingly enough, Simmons(“Twilight”) says that a single institution liquidating its positions sank oil prices for six months in the mid-1990s. This time we may have dozens of major players liquidating their positions.
The speculators lose control.
So, Benny, how did the speculators get control in the first place? What makes you think they have control? And don’t say high prices.
Seems like one explanation for the drop is that the US economy is going cryogenic. As I’ve said before, I think we’re all better off in a healthy economy with high oil prices.
But then I guess the short term economic policies of the last few decades are coming home to roost…
“Last week various analysts said there was talk that Mexico, the world’s fifth largest oil producer, was hedging its bets – the country was said to be signing contracts to deliver oil several years into the future at today’s prices. Essentially, it was betting oil prices have peaked.
Analysts say if other oil producers follow suit and lock in future contracts, that could be one thing that would cause oil prices to fall, far and fast.”
http://tinyurl.com/67yzwz
Optimist:
If you agree that oil demand is inelastic in the short-tun, then you have to agree that if someone can raise prices, demand will not fall. The demand appears to validate the new higher price.
I can’t prove it, but if speculators did manipulate prices upwards in the last several years, the physical market would have validated it. People can’t change out of oil use in a day, or due to a temp. blip in prices.
We have now reached the stage where the physical market is rebelling, and demand is withering. I call this ealry-stage mini-elasticity. We are only about one-third of the way through the corrrective process. The real drops in demand are coming. As year after year of higher MPG cars replace lower MPG cars. The GM Volt, and its promise of 90 percent reductions in demand.
But supply is still growing.
But go to the Simmons website and read his commentary from the 1990s. He states a single speculative liquidator depressed oil prices for six months.
What happens if the commodity funds start liquidatng, due to withdrawels?
The speculators had a great, great run. I take my hat off my bald head. Maybe they have another leg to this. But I think they are finished.
I wish I knew if this is going to be the Mother of all Price Corrections, or a long, long,, long drift down.
DoggyDogWorld –
It was western SD around the Black Hills. I guess far enough away from corn country and close enough to Wyoming/Montana. We did notice that you had to be careful and choose the mid-grade rather than the cheapest gas to get the non-E10 fuel. I’m not sure which grade we got in Montana, Wyoming, and Colorado as I’m usually the one washing prairie bugs off the windshield, but I know it wasn’t until KS that we were forced back into ethanol land.
I was shocked by the dramatic gas mileage difference, but the only other thing different than our normal driving was the fact that we did not use the A/C for most of the mountain states, and again, we were driving at least 10 miles an hour faster than around home, so I figured that would cancel each other out. The gas mileage differences also were similar in our old ’95 Civic, which differed by about 5 mpg on average when we got out of the ethanol-zone.
Do refiners blend? I thoguht blending was done further downstream, at the distribution terminal.
At the bigger refiners, you often have people in the same general group doing both. So, technically it isn’t at the refinery, but if often isn’t far off, and done by the same company.
are new cars engineered to use the 10% ethanol blended gasoline more efficiently than old cars seem to be?
There are quite a few anecdotal reports of this. I am not aware of a large, independent study showing it, but in theory it is possible if the compression ratios are increased. But that also means that non-ethanol blends will need to be pretty high in octane to avoid preignition.
Cheers, RR
RR can you post on Gore’s call to eliminate oil consumption by 2018
It’s on my ‘to do’ list, but so are a lot of other things.
Robin, SD is #6 in corn acreage and is adjacent to #1 Iowa and #3 Nebraska, so I’m shocked any stations offer ethanol-free blends.
I note you drove through some higher elevations. Air is roughly 20% denser at sea level than at 5000 feet elevation. This can have a big effect on highway mileage. As I said controlled tests generally show a couple percent MPG difference with E10. It’d be interesting to run a controlled test and see if there is something specific to your car (e.g. different fuel injection system) or if other factors such as elevation explain your results.
Benny,
I think you’re quite wrong on this:
1. Speculators have no more real effect on oil prices, than gamblers on the outcome of a sporting event. Note: I’m not saying no effect, expectations can certainly play a role. But the role is limited.
2. I think you’re overestimating the Chevy Volt. Here’s the skeptics’ list. I think people like you and me, making everyday decisions (Do I really need to drive for this?) will have a much bigger effect on demand. As is already happening.
3. Simmons is full of horse manure: no speculator can depress prices for that long. A speculator can cause a short spike (King was going on about one speculator taking oil prices above $100/bbl on Jan 2. Whooppee! Looking back, who cares what that speculator did?), but a six month depression? Evidence, please.
4. The drop in US demand is going to kill US refiners, who, as part of the evil Big Oil, won’t get any sympathy. Globally oil producers (those who pump crude) will continue to make a killing, as long as global demand remains strong. Thanks, in part, to subsidies, global demand is a strong as ever…
Speculators have no more real effect on oil prices, than gamblers on the outcome of a sporting event.
Speculators can have a large short-term effect. If a bunch of new pension money flows into oil futures on the long side tomorrow, the price will go up. Perhaps by a lot. This higher price will cause supply and demand response, but these responses happen very slowly. A sub-1% response does not cause a meaningful stockpile build in a month or even a quarter. It certainly would over several years, though, so the idea that he runup is ALL speculative lacks merit.
As for the Volt you are right. I’m a big fan but you need 3 million Volts to cut US gasoline consumption 1%. We won’t even have 300k Volts until 2014, best case. It’s a non-factor.
Here is what I noticed concerning Ethanol blended with 87 octane pump gas in a 3/2 ratio.
As per David Blume in “Alcohol can be a Gas” my mpg did slip at highway speeds. David also promised that mpg would not suffer much at all if autos were
geared for making use of the torque at lower rpm in high octane Ethanol.
I did get same mpg at 40 to 45 mph in 5th gear as the high octane blend was able to push my Subaru Legacy down the road at 1500 to 1700 rpm.
More here: http://tinyurl.com/5nftmm