Monday, February 23, 2015

Is Ethanol Being Forced Down Our Throats?

Breaking Story: National Public Radio (NPR) has a report which mirrors the major point of our following blog article -- Go Here.
What Would We Replace Ethanol With?

In the U.S., ethanol has become a "Whipping Boy" -- especially among Tea Party Types as yet another example of "Big Government" intrusion on free markets and personal liberties. But in Media reporting and debate, three key aspects of ethanol blending in gasoline are almost never mentioned (as if these realities don't exist):

  1. Octane Requirements;
  2. An Oxygenate for Cleaner Air.
  3. Cancer Concerns with Ethanol Alternatives.

Octane: Octane rating (RON, MON) is a measure of a fuel's ability to resist/reduce the reaction of gasoline to combust/ignite under pressure in a car's engine cylinder (called anti-knock, AKI). Without proper octane levels in gas we buy at the pump, automobile performance levels will decrease and cause engine damage.

Un-blended gasoline (E-0 ethanol free) has a typical octane rating of ~84 and thus needs an octane enhancer to achieve a minimum rating of 87. Ethanol has a high octane rating (~113), where the majority of U.S. gasoline today is blended with ~10% ethanol (called E-10) to achieve the needed regular grade octane rating level of 87 for proper engine performance:

Reason #1 Why Ethanol is Blended With Gasoline

Unblended Gas (E-0)
Ethanol (E-100)
Gas @ Pump (E-10)
(The above chart illustrates the typical practice used of splash blending.)

Clearly the Media is not presenting the significance of this ~10% ethanol blending level -- which is not a "Big-Government Mandate" but an automotive engineering requirement for a minimum 87 octane rating in gasoline.

Octane's History: For decades, the principle source to meet minimum octane requirements in gasoline was lead. But according to every World Health Organization this results in severe health problems (e.g., central nervous system damage, neurological development in children, fertility problems, high blood pressure, kidney damage).

In fact, there are now only 4 Countries in the entire World that have not taken action to eliminate lead in gasoline -- North Korea, Yemen, Afghanistan, and Burma.

In the 1990's, the U.S. EPA began requiring that lead be phased out of gasoline. Initially, this was achieved by using the high octane and oxygenate additive MTBE (derived from fossil fuels). However in the early 2000's, research from numerous national and international Health Organizations found that high usage levels of MTBE was likely a cancer causing agent. While the EPA has not specifically banned MTBE, its use has been banned in about half of the U.S. by State Legislatures.

States Banning MTBE
Like on so many other environmental issues (assessing economic costs versus health benefits under scientific uncertainty), the opinion on MTBE generally followed the Red State versus Blue State deep cultural divide that exists in the U.S. (as the above map reflects).

For all practical purposes however, the MTBE controversy was settled not by Regulation but by the Courts. MTBE Manufactures and Blenders were being hauled into Courts (in hundreds of lawsuits) and losing. In an attempt to address this lawsuit problem by Blenders/Manufacturers occurring at State and local levels, Tea Party Members in the U.S. Congress (e.g., Rep. Joe Barton of Texas, Chairman of the House Energy & Commerce Committee) attempted to protect the MTBE Industry through Federal indemnification legislation -- which was rejected by the U.S. Senate.

Without Federal protection from environmental damage lawsuits (similar to what the Nuclear Power Industry would receive for any accident)1, MTBE Manufacturers/Blenders decided it just wasn't worth the legal exposure and hassle.
(1) The Price Anderson Nuclear Industries Indemnity Act.

Energy Policy Act of 2005: This Federal legislation created the Renewable Fuel Standard (RFS) to collectively address the following issues -- issues which still exist today:

  1. Octane Requirements in Gasoline;
  2. Oxygenate Requirements in Gasoline;
  3. Foreign Oil Dependence;
  4. Economic Development for U.S. Farmers.
In anti-ethanol rhetoric which the Media seems all to willing to accept, the following untruths are routinely presented to the American Public:

The Ethanol Mandate: A perception is often presented that the RFS "mandates" that the ethanol production volume used by Gasoline Blenders must increase by pre-determined levels every year. The EPA has clearly stated that this is just untrue -- and that scheduled increases in the RFS are targets, and not mandates.2

For 2015, the EPA proposed blending volumes of 2.9 billion gallons less than the RFS scheduled targets; which is also 1.34 billion gallons less than in 2014. According to EIA and EPA estimates, ethanol currently provides a little less than 10% (9.74%) of the total volume of finished motor gasoline consumed in the U.S.

(2) Under Section 211(o)(7) of the Clean Air Act, the EPA has the authority to reduce the renewable fuel standard requirements if implementing the standard could cause severe economic harm or if there is inadequate domestic supply to meet the requirements.

Ethanol Must Be Blended In All Gasoline: This myth is refuted by the fact that ethanol free gasoline is blended and marketed throughout the U.S. (e.g., Boat Marinas). The problem here is not "Big Government" Regulations -- its the lack of overall consumer volume demand for this pricier product (which has higher cost non-ethanol octane enhancers which we will discuss in a moment).

In fact, the RFS does exactly the opposite of what the Tea Party says. The RFS reduced/simplified a myriad of cumbersome Regulations for gasoline, giving Blenders much more flexibility including the blending of special niche (e.g., Watercraft) gasolines. While most notable was the removal of the 2% oxygenate blending requirement, other aspects included volatile organic compounds (VOCs) and Mobile Source Air Toxics (MSAT) regulations.

One question that anti-ethanol proponents never address is: If Congress just eliminates the RFS, what Regulations would the EPA then impose for clean air? The age old adage "Be Careful What You Wish For" could result in EPA Regulations more restrictive that what currently exist for Blenders.3

(3) This includes increased EPA focus on the health concerns (e.g., fine particulates, cancer risks) of any sizable increase in the use of aromatics for automotive octane requirements (benzene, toluene, xylene).

The U.S. Is No Longer Dependent on Foreign Oil: Another argument often repeated in the Media is that since the enactment of the RFS, circumstances have changed dramatically -- as foreign oil imports have decreased from ~60% to ~33% by 2013.4 The problem with citing this metric is that it's both irrelevant (to the octane and oxygenate requirements discussed above) and also highly misleading.

Arguments that the RFS is no longer needed are cherry-picking data -- citing U.S. Net Imports (i.e., Gross Petroleum Imports minus Exports). Using a dependency metric of Gross Imports reflects a very different story -- where the U.S. is importing a whopping ~50% of its Oil Demand.4

(4) Using incomplete data from the EIA for 2014, estimated Gross Oil Imports were ~49% and Net Oil Imports were ~28%.

Data is also being cherry-picked as to where this Foreign Oil is coming from. While Spin Doctors can be technically correct that Canada now represents the largest single country importing oil to the U.S, this fails to reflect that a tremendous amount of oil is still being imported by OPEC countries (collectively exceeding that of Canada per EIA data).

U.S. Petroleum Imports
So why is the U.S. still dependent on so much foreign oil? As addressed in depth on a previous blog post, it comes down to two bullet points: (1) Not all oil is created the same; (2) Many U.S. Gasoline Refiners did some "Wrong Guessing".

Crude oil can come in numerous forms. It can be heavy or light, sour (high sulfur content) or sweet. The dramatic increase in recent U.S. Oil Production (from fracking) has primarily been in light oil.

But prior to this shale oil boom, many U.S. Gasoline Refiners spent billions of dollars to configure their plants for heavier and sour foreign oils -- from places like OPEC countries of Saudi Arabia, Iraq, and Venezuela. U.S. Gasoline Refiners using heavy oil (represented in the black dots on the chart below) are not going to just walk away en masse from their capital investment and reconfigure yet again for U.S. light oil.

Further, while it may be technically correct that U.S. dependence on foreign oil (using the metric of net imports) is at the lowest level in almost 30 years, the composition of this metric is very different between 2013 and 1986.
Dependency Metric
Gross Imports
Net Imports
The dramatic increase in U.S. Petroleum exports (primarily gasoline and diesel) reflects an "Inconvenient Truth" that Politicians, the Oil Industry, and the Media are not telling the American Public -- that the U.S. has a Refinery structural problem on foreign heavy oil dependency.
  1. The U.S. will continue to be very dependent on imported heavy oil until/unless many Refineries are re-configured to process light oils.
  2. Unless many U.S. Refineries are reconfigured, much of the U.S.'s light oil will be exported.5
  3. This results in higher cost heavy foreign oil ending up in U.S. consumer's gastanks, while lower cost domestic light oil is exported (indirectly through gasoline exports).
This last bullet point is extremely important in understanding foreign oil dependence. If U.S. Refiners were simply importing oil, refining it, and then exporting gasoline/diesel from this foreign oil, then the use of the Net Imports metric would be appropriate. But this isn't what's happening.

Current Oil Prices:
U.S. (WTI) Versus International (Brent)

With domestic oil (WTI) selling at a discount to the international Brent price, U.S. Refiners/Blenders have a competitive advantage over their international competitors. This explains why U.S. gasoline exports have increased so dramatically, as U.S. Gasoline Exporters have lower raw product crude oil cost.

(5) Either as refined products (primarily gasoline and diesel) or direct crude oil exports (if Congress rescinds the +30 year old U.S. Oil Embargo).

Applying the No Harm, No Foul Rule: Three octane alternatives to ethanol are the aromatic compounds benzene, toluene, and xylene. These aromatics can be produced via high-pressure catalytic reformers in the same refineries that produce other petroleum feedstock for gasoline blending. In a recent study from the University of Illinois, the price of these 3 aromatics was compared with ethanol over a two year period -- January 2013 through January 2015.

As the above graph illustrates, ethanol prices were almost always substantially lower than the price of the other aromatics (with the gap recently narrowing but still favoring ethanol even with the collapse of +$100/bbl oil prices).

Anyone doubting the validity of the above data should think about something. The price of premium octane grades at the pump (greater than 87) always are significantly higher than regular. Higher octane ratings in premium grades are being achieved by using these non-ethanol aromatics.

Thus, by considering three points we can put Tea Party ideological arguments that customers must always have a freedom of choice into a pragmatic context:

  1. Historically, the price of ethanol beats the costs of its alternatives as a needed octane enhancer for automotive engines.
  2. In light of Refiners resistance to commit extensive capital to reconfigure their facilities for domestic light oil, it is inconceivable they would commit billions of dollars in capital to produce octane enhancers to replace lower cost ethanol.
  3. But even if Refiners did want to commit extensive capital to produce non-ethanol replacement aromatics like benzene, they couldn't do it. Benzene is a carcinogen and limited by the EPA to a blending level of 0.62 percent (in the E.U. it's 1%). Also, there are numerous red flag health concerns with the mass use of other options like toluene as well.
What Rescinding the RFS Would Do: As shown, simply rescinding the RFS would have very little (if any) impact on the current volume of ethanol blended into gasoline. What it would do is likely destroy the promising and emerging cellulosic (e.g., using feedstocks such as agricultural wastes instead of corn) ethanol industry.


2017 EPA Renewable Fuel Standards Volumes:
EPA Finalizes Increase in Renewable Fuel Volumes
Analysis of EPA Ethanol Volumes
Best Analysis of EPA 2017 Ethanol Volumes

Additional News Stories & Sources:
Ricardo Turbo Boost Engines Optimizes Ethanol
The Road to High Octane Fuels (Union of Concerned Scientists)
The Competitive Position of Ethanol as an Octane Enhancer in 2016
Bobby Likis Interview with Brian West of ORNL (Excellent)
Engine Knock and Octane
Health Concerns of the BTEX Complex -- Benzene, Toluene, Xylene
History of Octane
What is Octane?
Future Growth in Ethanol will be in Turbo Performance Engines
Higher Ethanol Blends Would Reduce Air Pollution -- (Bloomberg)
Urban Air Initiative.
Steve Vander Griend -- (Facebook).
Review of Octane Enhancers -- (NREL).
Technical White Paper on Ethanol -- (RFA).
Higher octane, smaller engines, higher fuel efficiency -- (MIT)
The future of engines -- Turbo
The Incrdible Shrinking Engine
Fluid Catalytic Cracking Unit (FCCU) and Octane
Options for Octane Requirements
EPA's Authority to Regulate Octane
The Gasoline BOBs -- (RBOB & CBOB).
Ethanol Retains Low Cost Status for Octane Enhancers for 2015
Health concerns with Aromatics in Gasoline (Benzine, Toluene, Xylene).
Energy Discount & Mileage Estimates for Ethanol.
Could the Hydrogen Economy Run on Ethanol?

Notes on Octane: Increasingly stringent environmental regulation is causing more refiners to seek solutions to offset octane loss due to deeper hydrotreating of the naphtha streams to remove sulfur.

In the US, the growth in light, sweet domestic crude processing has resulted in an octane shortfall in some refineries, creating a clear value proposition for higher octane from the FCCU.

The catalytic reforming process produces most of the aromatic streams for refining, as well as xylenes for petrochemicals. Benzene extraction from FCC naphtha is an option that is being considered to both comply with gasoline specifications and add value to the aromatics produced, but this option requires capital investment. Moreover, steam crackers and new unit constructions and startups in the petrochemical sector do target increased aromatic production, and, as a result, extraction of aromatics from the FCCU is not the preferred option.

Notes on Ethanol's Current Blending Rate of ~10%: In 2015, about 13.7 billion gallons of fuel ethanol were added to motor gasoline produced in the United States, and fuel ethanol accounted for about 10% of the total volume of finished motor gasoline consumed in the United States.

My best to re-create this EIA 10% quote: (1) Go to Department of Energy's EIA Webpage on Ethanol Production for 2015; and take yearly number and divide by 365 (331,897/365 equals 909.307 thousand barrels per day); (2) Go to EIA Webpage on Oil Production. For 2015 Finished Motor Gasoline was 9,161 thousand barrels per day. 909/9161 equals a little less than 10%.

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