The Past, Present, and Future of Ethanol

In our last 2 blogs, the past to the present of ethanol is discussed -- looking at the health origins of why its use was needed in the first place, and ethanol's continuing importance today in reducing U.S. spending on foreign oil (OPEC).

Today we will look at the future, but first let's do a quick review:

Health Benefits

War, Terrorism, China, & Oil

Origins in Health Benefits: This blog post discusses some key aspects of gasoline formulation and how a blend rate of ~10% ethanol (E-10) replaced previously used health threatening additives (lead for octane requirements, MTBE for fuel oxygenation). These health benefits from cleaner fuels (reducing rates of cancer, child autism, asthma, etc.) have been firmly established in medical science for decades.

Consequences of OPEC Oil Dependence: This blog "connects the dots" of past and continued U.S. dependence on Mid-East oil to:

Terrorism & War: From the attacks of 9/11 to now Syria, the
    dirty footprint of oil money to fund/cause these conflicts always
    emerges as a common denominator.

Financial Strength of U.S.: Over the past 30 years, the U.S. has
    reportedly now spent ~$8 trillion to protect the flow of oil in the
    Mid-East. In a context of the current debt ceiling debate, this
    would represent about one-half of all outstanding U.S. debt.

Opportunism by China in the Middle East: The biggest benefactor
    of U.S. "blood and treasure" is China, as they are now the #1
    customer of oil from Iraq and other Persian Gulf Countries.

Economic Strength of the U.S.: Historically, the two primary
    causes of the massive U.S. trade deficit has been imports of
    foreign oil and Chinese products -- resulting in the vast transfer
    of American wealth and jobs to the Middle-East and China.

Understanding the Drivers of Ethanol's Future. Of total gasoline currently consumed in the U.S., ~10% is blended with ethanol.⁽¹⁾ Ethanol at E-10 blending levels represents the lowest cost clean-fuel option to meet health standards for needed non-lead octane and oxygenate requirements -- with estimated consumer savings of ~34¢ per gallon below other available options.⁽²⁾

But with the growth rate in gasoline consumption (needing E-10) expected to remain flat (less consumer demand as a result of greater auto MPG, the economic recession, and oil prices above $100/bbl), any meaningful volume increase in ethanol use will only occur with blending rates above 10% (E-15 to E-85).

Under the Renewable Fuel Standard (RFS) "targeted" increases in ethanol use are scheduled (below graph). However, these "targets" are not "set-in-stone" mandates. The appropriateness of required yearly volume levels are reviewed each year, and must consider current market factors such as price and available biofuel supply.

Since the use of E-10 is inextricably tied to compliance with clean-fuel requirements, it is highly unlikely to inconceivable that the use of E-10 could be "eliminated or totally voluntary". Questions that anti-ethanol proponents never address are: "What would they replace it with? -- and what would be the cost?"

What is highly in doubt however, is the implementation of RFS requirements above a current 10% blending level (called the blend wall) either by the EPA (which administers the RFS Program), or through Congress (new legislation to modify or even eliminate the RFS). Since blending levels above ~10% are not required to meet current clean-fuel requirements, the argument for increased ethanol use changes -- from health benefits to primarily price and availability.

As this "blend wall" is approached, we are currently seeing this "price dynamic" being played out, with reports that the EPA will likely reduce required 2014 ethanol levels below the "targeted" RFS levels.

Understanding the basics of this "pricing dynamic" for fuel blends >10% (E-15 to E-85) is pretty easy. Per the EPA, ethanol (E-100) contains ~30% less energy content than gasoline. Thus, simply comparing the market price of ethanol versus gasoline is an un-useful "apples to oranges" comparison. An adjustment must be made for this inherent "energy content penalty" (less MPG).

The below graphic illustrates this, where ethanol (E-100) is currently 83¢ per gallon cheaper than gasoline ($2.64 minus $1.81). Applying the "energy content penalty", the price point where a consumer would be currently indifferent to gasoline or ethanol would be an ethanol cost of $1.85 per gallon ($2.64 times 70%).

Currently, the price of ethanol represents a very small savings of 4¢ per gallon. But for much of 2013, ethanol's "adjusted" cost has been much higher than gasoline -- as a result of high corn feed-stock prices from drought in the Mid-West.

Certainty and Uncertainty of the Future.   It is believed that the future of ethanol and bio-fuels will likely follow one of two paths:

Low Growth -- E-10 continues to be used in almost all gasoline
    to comply with clean-fuel regulations. E-15's use is limited
    in the U.S., with market growth coming primarily from Mid-
    western States (where most U.S. ethanol is produced).

High Growth -- Demand for very high levels of ethanol (E-85
    and even E-100) increases dramatically throughout the U.S. as a
    result of technology advancements in:
      (1) Cellulosic ethanol production that significantly lowers costs;
      (2) Automotive engineering (engine turbo-charging) that
            reduces the "MPG penalty" of ethanol.

There are two areas of future technology advancements to keep an eye on. The first is in the development of cost effective enzymes to break down celluloic feedstocks (e.g., switchgrass, energycane, crop waste, etc.) into fermentable sugars for ethanol production. As the above chart on the Renewable Fuel Standard illustrates, cellulosic (non-corn feedstock) ethanol was always envisioned as the long-term future of ethanol.

One type of feed-stock source that could buy time until enzyme development reaches its full potential is the use of "bridge crops" (such as drought resistant sweet sorghum) using a hybrid approach of plant sugar (brix) extraction and also enzyme technology on the crop's waste steam (i.e., bagasse, presscake).

A second area to watch is in automotive technology advancements of the "incredible shrinking engine size". We are already seeing early glimpses of this technology being introduced into the marketplace with Ford's "Eco-boost engines". A key building block in understanding ethanol's role in engine advancements of "turbo-charging" is octane content:

Ethanol Vs. Gasoline Comparison:	Octane Rating
Ethanol (E-100)	113
Unblended Gas (E-0)	84

While our future blogs will get "Geeky" in discussing turbo-charging advancements -- The basic concept is the development of smaller engines requiring high octane levels (as found in ethanol) that generate greater power. A simplistic "Average Joe" visualization would be putting an engine the size of a Volkswagen Beetle into a large SUV, and providing the same performance to the driver.

With smaller engines having less weight and increased efficiency (e.g., running cooler), Ricardo Engines (a leader in turbo-charging) suggests that ethanol's (E-100) current "MPG penalty" could be reduced from 30% to 14%. Applying this lower "MPG penalty" to today's gasoline prices would result in current ethanol (E-100) savings of 46¢ per gallon.

Note on MPG Penalty: The highest blend of ethanol sold in retail gasoline is E-85. In AAA's daily tracking of retail gas prices, a MPG Penalty for E-85 of 24.018% is used (vs. ~30% for E-100). E-85's MPG Penalty using the potential Ricardo efficiency gains is 10.418% (vs. 14% for E-100).

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Current Ethanol Wholesale Commodity Price
Current Gasoline Wholesale Commodity Price
Current E-85 Retail Prices by State
Current National Average Gasoline Prices