Sunday, October 21, 2012

Current Gas Vs. Ethanol Prices (Oct. 19, 2012)

The below pink line is the commodity/wholesale price of 100% ethanol (E-100). But as a N.Y. Times story explains, ethanol gets less MPG than gasoline. The green line adjusts (increases the price) for the lower energy efficiency of ethanol, allowing an "Apples to Apples" comparison with the wholesale price of gas (blue line). The red line is the average of all U.S. retail pump prices of gasoline.
Retail Gasoline Prices: As the below map shows, the current national average (above chart's red line) is skewed upward by spikes in Western prices caused by current refinery problems in California (fires, questionable maintenance).

Current Retail Gasoline Prices by Region
The good news is that for most of the U.S., each October marks the annual date where gasoline refiners start switching production to cheaper fuel blends for cooler weather. During summer months, higher cost blends are used to reduce air pollution (e.g., smog). Thus excluding any unforeseen major market event (e.g., war in the Middle East) consumers should expect to see a decrease in pump prices through next Spring.

Ethanol Prices: A simple linear regression statistical analysis shows that U.S. ethanol prices can be almost entirely explained (a R2 of .91) by the commodity price of #2 yellow corn (which is not used for human consumption). The extreme volatility in ethanol prices since July is the result of a series of initial over-reactions and then corrections in corn futures markets as to the actual severity of the drought in the Midwest on crop yields. As a result of this price increase, ethanol production levels have decreased ~20% since July. With low or negative profit margins, many ethanol plants have either reduced output or temporarily shut down entirely.

During 2012, we agree with two studies (here and here) that ethanol use has had a negligible impact on retail gas prices. This is because the greatest use of ethanol is a 10% or less blend with gasoline (E-10). Year to date, 10% of the cumulative price differential between the wholesale price of ethanol (adjusted for efficiency) and gasoline is less than 3¢ per gallon. Also recognizing that without ethanol, fuel blenders would have to substitute higher cost sources of octane additives, the price differential is probably only about 1¢ per gallon.

However long term, Supporters of ethanol must recognize a clear reality. As long as the adjusted price of ethanol (green line) is higher than the wholesale price of gasoline (blue line), ethanol use will always be criticized and lack acceptance by the U.S. Public even at low E-10 blend levels.

This lower cost can happen in two ways: (1) lowering ethanol's production cost through cheaper feedstocks and better conversion technologies (e.g., cellulosic enzymes); (2) greater auto engine efficiency utilizing ethanol's higher octane levels (smaller engines using turbo-boost).

The Renewable Fuel Standard: The recent volatility and price spikes of ethanol from the Mid-western drought is a good illustration that the future of ethanol is not from corn. Feedstock and production technology diversity is needed from other sources (sorghum, cellulosic). In passing the Renewable Fuels Standard requiring ethanol blending with gasoline, Congress recognized this point by capping the use of corn feedstocks (which current ethanol production has almost approached).

For all the criticism that ethanol use receives, what is generally lost by the general public is the amazing success story that has been so quickly achieved in accomplishing national goals for greater energy security and job creation. This achievement would not have been possible without using the existing corn industry's infrastructure in the Mid-west.

Did you know?: The Renewable Fuels Standard has resulted in a fundamental shift in gasoline formulation. The refining industry has now moved to using predominantly 84 octane "conventional" gasoline and then blending it with higher octane ethanol (around 113) to produce the 87 octane gasoline that is the most popular level with consumers. This change in refining practices is not easily reversed. While other octane enhancers could be used, ethanol's price make it the current lowest cost octane source of choice by refiners.

Data Sources:
Per numerous Sources (DOE, EPA), E-10 (10% ethanol) has ~3% less efficiency than E-0 (zero ethanol). Ethanol on a "net basis" has less BTU content, but higher octane.

-- Wholesale Ethanol prices are from the Chicago Board of Exchange.
-- Wholesale Gasoline prices are from the Chicago Board of Exchange.
-- Retail Gasoline prices are from Bloomberg's survey of national gas prices.
-- Corn Feedstock costs are calculated from Chicago Board of Exchange.
-- Distiller's Dried Grains (DDG) Futures (100 short tons) from CBOE.

-- Real Time Daily Trading Data on energy products.

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