A Redundant Subsidy

My latest is up at Forbes right now. It is about the redundant nature of our current ethanol subsidy:

A Redundant Subsidy

An excerpt:

As many ethanol producers have argued – the gasoline blender and not the ethanol producer receives the subsidy anyway. The gasoline blender – ExxonMobil for instance – buys ethanol for $1.70 per gallon (currently), receives a tax credit worth $0.45 per gallon (the credit was reduced to that level in 2009), and then blends it into gasoline that is presently wholesaling at approximately $1.90 per gallon. With the tax credit, the current price of ethanol on an energy equivalent basis to gasoline is just about equal to the $1.90 wholesale price of gasoline. So the tax credit compensates the gasoline blender for blending in a higher cost feedstock.

But what if the tax credit was not there? Would ExxonMobil blend less ethanol? No, they are mandated to blend a certain amount, and if they fail to do so they are penalized. So in the event that they did not get the tax credit, then the energy equivalent price they would pay for ethanol would be about $2.50 per gallon (based on ethanol’s current spot price). At a 10% blend, this would mean that at current prices the price charged for a gallon of ethanol-blended-gasoline would need to rise about six cents to keep the gasoline blender’s costs equivalent to the cost they currently have with the tax credit in place. The only difference would be that the cost would then be borne directly by drivers in proportion to the number of miles they drive.

I also walk through the history of U.S. ethanol subsidies. If they haven’t served their purpose by now, they never will.

58 thoughts on “A Redundant Subsidy”

  1. I don't think you can use "energy equivalence" in the calculation. Why would a refinery care about the energy in their product? They wholesale by volume. When I worked for a gas transportation company, the large commercial NG customers were billed by GJ not by cubic meters, due to the large variance in heat value of NG. That doesn't happen with retail NG or gasoline.

    If gasoline pump prices reflected energy content, you could then push that back to wholesale gasoline pricing, but without that it's the consumer that is paying a fixed price by volume regardless of the energy content.

  2. Of course consumers care about energy, otherwise E85 wouldn't have such trouble selling out in the Midwest. It is cheaper by volume than gasoline.

    The dollars per BTU really reflects the value to ExxonMobil. They are not going to voluntarily buy ethanol that is a few cents cheaper than gasoline, and that has everything to do with energy content.

    RR

  3. Just to further add to that, let's say the market was completely open. Refiners can choose to buy ethanol or not. If someone buys and blends ethanol, and their competitor doesn't, then their competitor will make it known that the ethanol blender is selling product with a lower energy content. In other words, consumers will notice a difference in MPG. The only want the ethanol blender can get around that is by charging less for his product.

    So energy content matters.

    RR

  4. Bob~

    Fuel companies should sell fuel by energy content, that's what really matters, and is the only fair way to let consumers know what they are buying.

    For example:

    According to the AAA fuel gauge website, the nationwide average for regular gasoline is now $2.61 per gallon. That works out to be $2.23 per 100,000 Btu.

    E10 is also selling for the same price by volume, $2.61 gallon. The equivalent of $2.31 per 100,000 Btu.

    According to the AAA, the nationwide average price for E85 is $2.43 per gallon. The equivalent of $2.92 per 100,000 Btu.

    Clearly, the more ethanol in the fuel, the less energy consumers get for their dollars.

    That should be transparent to consumers so they can make an informed decision about where to spend their fuel money.

    Selling motor fuel by energy content instead of by volume would be the smart — and fair — thing to do, although I can understand why Big Corn and Big Ethanol would not want to do that.

  5. I came across a very interesting number a while back. One quadrillion btu's of energy was used by US agriculture in 2005. 67% of that was fossil fuel use,and the rest was electricity. The country as a whole used 96 quadrillion btu's.

    We used a quadrillion(1000 trillion) btu's of energy to grow all our wheat,corn,rice,barley,oats,fruits,vegetables,and nuts in 2005. In 2009,we used 30% of the corn to produce 880 trillion btu's(10.6 billion gallons) of ethanol. A billion annual gallons of biodiesel(130 trillion btu's) would put farmers over the quadrillion mark.

    Yes,I know agricultural energy use probably grew in the last four years. Sorry,I couldn't find a current figure. But,it's safe to assume farmers will be net energy producers any time now. And they'll produce a whole lot of food as well. Here's the link for the quadrillion number. Chapter 5.

    http://tinyurl.com/yguzl5a

  6. Algae to solve the Pentagon's jet fuel problem…

    The proof will be in the pudding. That sounds like a sensational newspaper headline, unfounded on facts.

    Since no one yet has a successful commercial scale algae-to-fuel plant in operation, I wouldn't invest the kid's college education fund in this scheme.

    It could pan out, and it's worth exploring, but any claims that algae will solve the Pentagon's fuel problems is premature at this stage.

  7. Farmers could produce three btu's of liquid energy for every btu they consumed….while feeding the same number of people,if we used all the feed corn for ethanol.

    Granted,chicken rations would be cut in half. Still,it's pretty cool that farmers can produce both food AND energy.

  8. What's the difference in energy content between summer and winter blends of E0 gasoline?

    My guess is that it is 2 or 3%. That's something I always said about those complaining about the "hot fuel" issue. There is much more variation of fuel BTUs between summer and winter than what you will get from filling up in hot weather versus cold weather.

    Blender's don't have to produce lower BTU gasoline in the winter; it is just cheaper generally to blend butane. But demand is lower in the winter, so you don't see one blender not blending butane and then advertising that you can get better gas mileage on their gasoline.

    RR

  9. Robert,I think you should do more homework on the energy content of gasoline. It's not fair to say gasoline has 30% more energy than ethanol,because gasoline has to have SOMETHING in it to boost octane. Methanol is commonly used. It has 25% less energy content than ethanol. So,how much of a typical gallon of E0 is octane booster,and what's the energy content of it?

  10. It's not fair to say gasoline has 30% more energy than ethanol,because gasoline has to have SOMETHING in it to boost octane.

    That's not true Maury. Pure regular gasoline does not have any additives to increase (or boost) its octane rating.

    Adding ethanol will increase the octane rating of regular, but for most internal combustion engines on the road today, that's irrelevant. Higher octane fuel does nothing to increase power, performance, or the fuel mileage of an engine designed to run on regular gasoline.

    And how can it be "not fair" to state a fact? Gasoline does have a higher energy density than ethyl alcohol. That's a well-known and verifiable chemical property.

  11. "Pure regular gasoline does not have any additives to increase (or boost) its octane rating."

    That would mean an octane level of 40 or less Wendell. Where are you buying your gasoline man?

  12. That would mean an octane level of 40 or less Wendell. Where are you buying your gasoline man?

    You clearly do not know the first thing about gasoline, Maury. So perhaps it is you who should do homework.

    I used to blend gasoline. I know the octane of the blending components. I can easily make high octane gasoline without using ethanol. Alkylate, made in a refinery, has an octane in the mid-90's. Believe me, blender's know how to make high octane gasoline without having to use ethanol.

    RR

  13. "Believe me, blender's know how to make high octane gasoline without having to use ethanol."

    I never said they couldn't Robert. What I DID say was that if they use methanol….which they commonly do,its energy content would be even lower than ethanol. About 25% lower. I don't know the energy content of aklylate. Perhaps you do?

    Whatever is used to raise the octane,reformulated gasoline at the pump doesn't have the 125,000 btu's gasoline is famous for.

  14. That would mean an octane level of 40 or less Wendell. Where are you buying your gasoline man?

    Maury~

    You clearly have no idea what you are talking about.

    I burn 87-octane regular gasoline, and I buy it a fuel station that advertises they add no ethanol to their gasoline.

    There are at least five fueling stations in my area that advertise they add no ethanol, and they do a booming business.

    Side bar: When I burn pure gasoline, I find my average fuel economy jumps to 32 mpg v. the 29 mpg I get with E10. In my opinion, it is worth it to find fuel stations that sell pure gasoline instead of E10.

  15. What I DID say was that if they use methanol….which they commonly do…

    Can't wait to hear RR jump on you for that statement Maury.

  16. "Maury~

    You clearly have no idea what you are talking about."

    You're wrong Wendell. SOMETHING has to be added to raise octane levels. Without the additives,your poor engine would knock you silly. Unless the additives have EXACTLY 125,000 btu's per gallon,that gallon of gas at the pump DOES NOT have 125,000 btu's. Methanol lowers the btu's more than ethanol. THAT's a fact.

  17. "Can't wait to hear RR jump on you for that statement Maury."

    He would jump wrongly Wendell. Why don't you do some homework on the subject before putting your foot in your mouth?

  18. Maury, I have never known of a blender to put methanol in for raising octane. As cheap as methanol is relative to gasoline, if that was a real option everyone would do it. Maybe you mean MTBE?

    RR

  19. Yes, MTBE Robert. A product of methanol and butane. Methanol has 62,000 btu's per gallon,while butane is rated at 102,000. Obviously,any combination would be less than 125,000 btu's.

    All I'm saying is that we don't know the energy content of E0,because we don't know which additives were used or how much energy those additives contain.

  20. "It could be in the range of 115,000 – 117,000 Btu/gallon depending on how it's blended or cut"

    A gallon of E10 should contain 120,900 btu's Wendell. .90 X 125,000 btu's = 112,500. .10 X 84,000 = 8400. 120,900 total. Unless there're other additives which contain even fewer btu's,of course.

  21. Maury~

    I'll apologize. Gasoline could have a Btu content as high as 125,000 Btu/gallon. (Usually lower, but it could be as high as 125k.)

    Here is an easy-to-read table from the US Department of Energy showing the energy density of gasoline in the range 109,000 – 125,000 Btu/gallon: Energy Content of Fuels

  22. No need to apologize Wendell. Estimates for gasoline btu's are all over the place. Here's something else to consider. When MTBE was used to oxegenate gasoline,it was used 15.2% by volume. A gallon of E10 "probably" contains more energy than the gallon of gas that contained MTBE years ago. Alkylate is also typically used 10-15% by volume. I can't find the btu content of that one. What's the energy content of detergents? Is there any at all?

    Maybe we should go down to the pump and find out these btu's per gallon for ourselves.

  23. Yes, MTBE Robert. A product of methanol and butane.

    You know Maury, a little knowledge is a dangerous thing. You wrote that methanol is commonly used to boost octane. That is wrong on two counts. First, MTBE is derived from methanol which is derived from natural gas. But methanol isn't MTBE anymore than it is natural gas.

    Second, MTBE has been phased out, so it is no longer "commonly used." Ethanol has generally been a decent replacement for MTBE, but it is by no means the only oxygenate available.

    RR

  24. "First, MTBE is derived from methanol which is derived from natural gas. But methanol isn't MTBE anymore than it is natural gas."

    That's like saying my hamburger isn't a cow.

    "Ethanol has generally been a decent replacement for MTBE, but it is by no means the only oxygenate available."

    I didn't say it was Robert. It's also not the only octane booster around. But,something will be used if not ethanol. Unless we know the energy content of that "something",we don't know if E10 has more or less energy than E0.

  25. Unless we know the energy content of that "something",we don't know if E10 has more or less energy than E0.

    Argh! Maury, regular 87-octane gasoline (E0) has an octane rating of 87 when it comes from the refinery. It doesn't require any additives from "something" to reach 87 octane.

  26. That's still wrong, Maury. "Octane boosters" have been produced in refineries since refineries started. I don't need an octane booster. I can produce them all myself. I regularly blended high octane gasoline out of blending components like reformate, alkylate, butane, straight run gasoline, cracked gasoline, etc.

    So I can assure you that E0 coming out of a refinery has a higher energy content than E10. We simply don't boost octane with things that contain 76,000 BTUs/gallon other than ethanol.

    But I am curious as to your take on the essay itself. Do you agree that with the mandates, the subsidies are redundant?

    RR

  27. "It doesn't require any additives from "something" to reach 87 octane."

    Yes it does Wendell. Robert listed some of the various boosters that can be used. What he didn't do was give their btu rating. Until we know that,we can't know the energy content of E0.

  28. Robert listed some of the various boosters that can be used.

    Maury~

    Those boosters Robert could add at the refinery (blending components like reformate, alkylate, butane, straight run gasoline, cracked gasoline, etc.) are all refinery distillation or catalytic products and just part of the blending process.

    Those blending additives are rearranged hydrocarbons that originated from the petroleum feedstock and aren't chemical additives or boosters — such as MTBE — from an outside source.

  29. "Those blending additives are rearranged hydrocarbons that originated from the petroleum feedstock and aren't chemical additives or boosters — such as MTBE — from an outside source."

    That doesn't mean they have the same btu's as gasoline Wendell. I guarantee you they don't. We know the btu range of gasoline varies from 109,000-125,000. What we don't know is how many btu's gasoline contains after various additives and detergents are used. We probably should if we're going to continue claiming E10 has a 3% energy penalty.

  30. That doesn't mean they have the same btu's as gasoline Wendell. I guarantee you they don't.

    You are wrong. The blending components ARE gasoline. When you see the BTUs of gasoline, those things are already in there. Besides that, with the exception of butane (which goes from about 2% in the summer to maybe 10% in the winter), the BTU value of all of those components is very similar.

    The reason is that they are all composed of similar hydrocarbons in the C5-C9 range. It is only when you start adding oxygenated compounds that you start to impact the BTU value.

    RR

  31. Enough. The gasoline that goes into the E10 blend is 84 Octane. The gasoline in the E0 blend is brought up to 87 through blending toulene (sp?) or some other higher octane additive. It's not important.

    The important thing is Ethanol has a Much higher Octane rating than gasoline. It doesn't entirely compensate for the lower btu content when burned in your standard ICE, but it compensates, somewhat. Instead of getting 32% less mileage you get about 20% less mileage, on average.

    If you have been running E10, and switch to E0 sometimes you will get a pretty good boost in mileage for the first tank or so. That's because the computer map is set to run a little lean (as to the O2 content of the exhaust gases.)

    HINT: If you go from a low/no ethanol blend to a higher ethanol blend, don't fill your tank, and then drive over to the quikshop, shut your engine off, and go inside for a cup of coffee. You need to drive at least 7 to 10 miles after filling to allow your map to adjust.

    Anyhoo, I'm going to amaze everyone, and agree with Robert on this one. I think it's time to put an end to the Blender's credit for all but E20, and higher.

    This would save the taxpayer probably 95% of their money, and still encourage the production of ALTERNATIVE, DOMESTIC fuel.

    Of course, we would have to make the mandate reflect the output of the refineries, but that would be no problem.

    There, Robert, we agree on something.

  32. Naphtha is used primarily as feedstock for producing a high octane gasoline component (via the catalytic reforming process). It is also used in the petrochemical industry for producing olefins in steam crackers and in the chemical industry for solvent (cleaning) applications. Common products made with it include lighter fluid, fuel for camp stoves, and some cleaning solvents.

    And the btu value of naptha is all of 15,000. Now,would you rather ethanol or naptha in your gasoline Robert?

  33. And the btu value of naptha is all of 15,000. Now,would you rather ethanol or naptha in your gasoline Robert?

    Maury, you should have stopped a long time ago. The BTU value of naphtha is about 120,000 BTU/gal. So you continue to demonstrate that you do not know what you are talking about.

    But now let's turn the question back to you: Would you rather have naptha with its higher value or ethanol with a much lower value?

    Actually, the question is more complicated, because naphtha is a very low octane feedstock, and is almost always processed before blending. You can blend in some directly, but your octane suffers.

    RR

  34. The gasoline that goes into the E10 blend is 84 Octane.

    That’s because they blend it to that only if it is going to be mixed with ethanol. We used to blend that stuff as well. But we could have just as easily blended 92 octane from the components on hand. Alkylate is a very nice octane booster that is produced internally in most refineries.

    Of course, we would have to make the mandate reflect the output of the refineries, but that would be no problem.

    That already is the case.

    RR

  35. This is an interesting table. Looks authentic enough. According to this,the btu difference between winter gasoline and E10 is virtually nil. Same for MTBE or ethanol reformulated gasoline. The biggest difference is between summer gasoline and gasoline reformulated with ethanol at 2664 btu's per gallon. An energy penalty of less than 2%.

    http://tinyurl.com/yj3nw8f

  36. "Do you agree that with the mandates, the subsidies are redundant?"

    It would be more appropriate to regard the 'mandate' as an unconstitutional taking. After all, the Political Class are taking money out of their nominal bosses pocket by forcing them to spend it on something they may not want.

    Under the Constitution (how quaint that sounds!), the government can take — but it has to pay the market price for what it takes.

    It would be better to sweep away the mandates along with the subsidies, and then sweep away all the bureaucratic red tape that kills innovation. Remember — the global objective is to increase total supply, not reduce total demand.

  37. "Maury, you should have stopped a long time ago. The BTU value of naphtha is about 120,000 BTU/gal."

    That's jet fuel naptha Robert. I'm referring to the low-grade junk stuff that's upgraded for use as an octane additive. The btu value of naptha when used as an octane booster is 15,000.

    http://tinyurl.com/yjdu5yw

  38. That's jet fuel naptha Robert. I'm referring to the low-grade junk stuff that's upgraded for use as an octane additive. The btu value of naptha when used as an octane booster is 15,000.

    Maury, again you don't know what you are talking about. Be careful of what you read on the Internet, because it could be wrong. In this case, it is. They either made a typo, or they are talking about something besides naphtha.

    You asked me once how iso-butanol and normal butanol could have different BTU values, given that they are both 4 carbon alcohols. So then I would ask you exactly what you think naphtha is. It is a hydrocarbon mixture in the gasoline range, and as such it has the same BTU value. It is not possible for it to have the BTU value you stated, unless they are quoting it per pound and not per gallon.

    RR

  39. This is an interesting table.

    Maury~

    One thing left off that table: At this time of year, E85 isn't really E85. It's blended as E70 so cars using it will start more easily.

    I've never been able to understand how stations advertising E85 can sell E70 in the winter without telling customers they've made the switch in blend ratio.

    It seems at this time of year they should have to change all their signs to say E70 instead of E85.

  40. Clickable Link to Takchess's Novozymes story.

    They say Cost of Enzymes down to $0.50/gal. for cellulosic ethanol.

    $2.00 Cellulosic – on the way.

    Novozymes is a "Real" company. A, really, real company. Cellulosic is starting to look like a real thing.

  41. Between people posting links and sending me comments, I must have seen reference to that DARPA story a dozen times. I guess I will need to write something up on it.

    RR

  42. Maury, I will await your admission that your naphtha claims are in error. At the end of the day, you should know you can't BS me about the energy content of a gasoline blending component that is produced in refineries.

    RR

  43. I'm not out to sell you a bridge Robert. I'll take your word on the naptha.

    What about the link that said the energy content of winter gasoline and E10 were virtually the same? Should we not believe that one either?

    If the DARPA hoax turns out to be a hoax,I'll settle for $2 cellulosic. LOL.

  44. New Genecor (another really, real company) Enzyme Reduces Dosing by 3 – 1

    Zeachem also has a breakthrough. I think the important thing is that some Big companies are seriously competing, and getting excited.

    Add to that, someone with Jeff Broin's credibility (works with Novozymes) saying he's pretty sure he'll be producing $2.25 ethanol (w/o subsidies) by 2012, and you've just got to take them a little bit seriously.

  45. What about the link that said the energy content of winter gasoline and E10 were virtually the same? Should we not believe that one either?

    I already said this to Bob above; that the BTU loss from summer to winter is probably 2-3%, which is about the same as going from E0 to E10. The problem is that you still pay a penalty then to go to E10 in the winter. So it doesn't matter the season, you have a penalty. After all, you can't compare winter E0 to summer E10. So I am not really sure as to the point you are trying to make.

    RR

  46. What about the link that said the energy content of winter gasoline and E10 were virtually the same? Should we not believe that one either?

    Follow the link to the reference. What is quoted is not E10, it's E5.71

  47. EPA's 1995 rule for RFG only required that 2% oxygen be in gasoline, so that meant either ~10%vol MTBE or ~6%vol ethanol. Of course in 2005 Congress swapped that requirement for the ethanol mandates. Also,there is very little E0 gasoline being produced today that you can put directly in your tank. Almost 80% of gasoline is E10 – all of that E10 is blended with a special RBOB blendstock with octane ~84, but I don't know if I've seen good stats on its BTUs. In the Northeast and CA it's probably closer to 95% ethanol-blended gasoline in the market.

    This BTU ground has been plowed many times before, and to me it mostly points out again that 'gasoline' is a complex variable product and changes over time. We always need to be mindful of exactly what kinds of products we're attempting to compare and of using data that is several years old that might not reflect current conditions. Depending on what kind of comparison is being made, even small differences can be important.

  48. Also,there is very little E0 gasoline being produced today that you can put directly in your tank…

    Anon~

    There are several fuel stations in the city where I live that advertise, "No ethanol in our gas." and their regular pumps say 87-octane. Would I be wrong to assume they are selling 87-octane E0?

  49. Maury, I just looked at your linked chart from wikipedia. The chart does not say what you think it says. ETBE is not ethanol. ETBE is ethyl tert-butyl ether. It's not even an alcohol, just like MTBE is not methanol.

    Both ETBE ( (CH3)3-C-O-CH2-CH3 ) and MTBE ( (CH3)3-C-O-CH3 ) have significantly higher ratios of carbon to oxygen than ethanol (H-O-CH2-CH3) and methanol (H-O-CH3), respectively. It is the C-H bonds that yield the relevant energy in combustion. Higher ratios of carbon to oxygen means greater energy densities.

    Please try not to compare the difference between discrete chemicals (MTBE/methanol/methane, for example) to the difference between hamburger and cow. It betrays a startling lack of understanding/knowledge of chemistry.

    If it weren't for naming conventions, there is little reason to compare methanol to MTBE. It might be beneficial if you think of MTBE as an ether with 5 carbons and 1 oxygen and methanol as an alcohol with 1 carbon and 1 oxygen. Hopefully you can begin to grasp the incredible difference between the two.

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