Magical Thinking on E85 and Ethanol Mandates
Posted November 22, 2013
Three new papers released by Iowa State University’s Center for Agriculture and Rural Development (CARD) try to portray E85 fuel as both a solution to the ethanol “blend wall” created by the Renewable Fuel Standard’s (RFS) mandates and as a reason to set ethanol volume mandates beyond what can safely be consumed as conventional E10 gasoline. Unfortunately, the papers contain deficiencies, omit key facts, rely too much on hoped-for outcomes and confuse the role of consumers and market signals.
Last week, EPA acknowledged the reality of the blend wall as it proposed how much ethanol would be required in the U.S. fuel supply for 2014:
The proposal seeks to put the Renewable Fuel Standard (RFS) program on a steady path forward – ensuring the continued long-term growth of the renewable fuel industry – while seeking input on different approaches to address the “E10 blend wall.” … Nearly all gasoline sold in the U.S. is now “E10,” which is fuel with up to 10 percent ethanol. Production of renewable fuels has been growing rapidly in recent years. At the same time, advances in vehicle fuel economy and other economic factors have pushed gasoline consumption far lower than what was expected when Congress passed the Renewable Fuel Standard in 2007. As a result, we are now at the “E10 blend wall,” the point at which the E10 fuel pool is saturated with ethanol. If gasoline demand continues to decline, as currently forecast, continuing growth in the use of ethanol will require greater use of higher ethanol blends such as E15 and E85.
Crashing through the blend wall – requiring more production of higher ethanol-blend fuels like E15 and E85 to satisfy RFS mandates, and pushing them into the marketplace – could have serious impacts on consumers and the broader economy.
In urging EPA to reduce the RFS ethanol mandates, API submitted an analysis of the RFS conducted by NERA Economic Consulting that said the program “… in its current form, will likely become infeasible within the next three or four years, which would result in significant harm to the U.S. economy.”
According to NERA, this harm could occur if refiners, trapped between satisfying RFS requirements and putting more higher ethanol-blend fuels into the market, reduce their RFS obligations by decreasing how much transportation fuel they supply domestically. NERA says the impacts could include:
- Driving up the cost of diesel by 300 percent and the cost of gasoline by 30 percent by 2015.
- A $775 billion decrease in U.S. GDP by 2015.
- A $580 billion decrease in worker take-home pay by 2015.
Against that backdrop, the CARD papers push greater use of E85 fuel. But there are a number of problems.
First, the papers themselves discuss E85’s limitations. For starters, only flex-fuel vehicles (FFVs) can use E85, which becomes a logistical issue because there’s a lack of E85 pumps across the country – only about 2,500 retail stations out of more than 150,000 offer it. That’s not because “Big Oil” is blocking the sale of E85, but because there’s a lack of consumer demand. Next, there’s a mismatch between pump locations and FFVs (illustrated by problems with the Energy Department’s own FFV program). And finally, E85 isn’t cost competitive – just look at AAA’s website that tracks retail E85 prices. Yes, we all agree: E85 faces serious challenges.
The CARD papers deal with the blend wall and E85’s challenges with hoped-for solutions. These avoid the approaching 2014 blend wall and focus instead on 2015.
CARD estimates that meeting the RFS mandates would require 13 billion gallons of ethanol to be consumed as E10 and the balance to be consumed as E85. The inference for 2014 is that 1.6 billion gallons of ethanol need to be consumed as E85, which works out to 2.2 billion gallons of E85. Even without considering E85’s cost disadvantage relative to E10 (due to its lower energy content), this volume far exceeds CARD’s own estimate that 1 billion gallons of E85 could be consumed for each additional 2,500 E85 stations (considering that approximately 2,500 currently exist).
This is simply misleading. Actual sales of E85 have never come close to an annual rate of 1 billion gallons per 2,500 stations. E85 is more costly on an energy-equivalent basis, let alone CARD’s requirement that it be “heavily discounted” to reach maximum sales.
The CARD papers run into more problems discussing Renewable Identification Numbers or RINs – the tradable credits refiners must submit to EPA in proportion to gasoline and diesel sales to demonstrate compliance with the RFS’ ethanol mandates.
CARD discusses mandates increasing the cost of ethanol production beyond their value of consumption and the role for RINs to close the price gap. The papers imply that ethanol producers will not produce extra biofuels unless they receive a price that covers increased cost of production. But they confuse a consumption mandate with production. They’re not the same. CARD ignores that the RFS and RINs apply only to the domestic market.
Finally, CARD ignores ethanol market dynamics. For example, ethanol production has expanded and the U.S. has been a net exporter of ethanol since 2010. Trade flows of ethanol are responding to market signals, which appear to be placing a higher value on ethanol for its use as a low-level blend gasoline blendstock than as a high-level blend as a gasoline replacement (such as E85).
As suggested by economic theory, it is entirely possible that markets would place a higher value on marginal ethanol (above what can be consumed in E10) as an export product. The economic law of supply and demand is at work, and it is not pointing to E85 being “heavily discounted” to gasoline containing 10 percent ethanol.
The CARD papers are just another distraction from the real problem: The RFS is fundamentally flawed and its ethanol mandates are broken. Rather than trying to push higher ethanol-blend fuels into the market, which the consumer isn’t demanding (E85) or which could harm engines (E15), we need the administration to keep the ethanol mandates below the E10 blend wall for 2014 and Congress to address the RFS with long-term and meaningful action.