AMSTERDAM – The United States currently has 139 ethanol plants in 26 states, with a total production capacity of approximately 7 billion gallons. An additional 91 ethanol plants are under construction or expanding at the moment with a total capacity of another 7 billion gallons. Undoubtedly, the supply side of the ethanol industry is growing at phenomenal speed. But it is not the supply side that worries investors at the moment, it’s the demand side. Because ethanol consumption is not keeping up with production growth, ethanol prices have dropped to as low as $1.55 per gallon, which at current corn prices results in tight, and sometimes negative, profit margins. Some analysts expect this to worsen because of two reasons. First of all, car manufacturers are currently not willing to provide vehicle warranties at ethanol blends beyond 10%, causing what is known as the E10 blend wall. Secondly, the Renewable Fuels Standard (RFS) target for 2012 is likely to be reached in 2008 and the Energy bill that could expand the RFS is struggling in the Senate. Therefore, the industry seems to be moving towards a structural surplus in production.
What you just read is a brief summary of what you have probably been hearing in the media for the past few weeks, or even months. The actual story is far more nuanced and it requires a Washington insider to tell it. Bob Dinneen, president of the Renewable Fuels Association, is much more positive about ethanol in the United States because he knows why consumption has been lagging behind, because he knows what are and what aren’t showstoppers for the industry, and more importantly, because he probably knows more about upcoming legislation than anyone else. In an interview with Ethanol Statistics he ‘announced’: “It will be a busy 12 months with respect to legislation in Washington, I suspect.”
Ethanol Market Opportunities: Beyond E10
People who oppose increased ethanol usage often refer to the fact that car manufacturers are currently not willing to provide vehicle warranties at ethanol blends beyond 10%. This would limit the consumption of ethanol to 10% of national gasoline demand, which is insufficient considering one of ethanol’s goals of energy security. But the state of Minnesota, in conjunction with the RFA, is engaged in a test program to determine the efficacy of moving forward with high level blends. The program looks at materials compatibility, drivability and emissions and its test phase is now largely completed.
“I need to preface my remarks with the fact that the reports have not yet been written up and I’ve not seen the data,” says Bob Dinneen, “but nobody at this point has told me that there is a real problem in the process. I am literally unaware of any showstoppers.”
Mr. Dinneen is realistically enough to admit that the test program does not answer every question there is going to be with respect to higher level blends. “We did not do durability testing, which will likely have to be done at some point, and we have not yet begun to do any analyses of the impact of higher level blends on small engines.” Coincidentally however, the Department of Energy has a test program that is indeed looking at those two aspects and Mr. Dinneen is hopeful that sometime next year, their will be a scientific and technical foundation that supports moving forward with a waiver request of the Environmental Protection Agency (EPA) for higher level blends. But despite being hopeful and confident about the end result, Mr. Dinneen shows that he understands how important public opinion is at this stage by adding, “The ethanol industry does not want to move forward with a higher level blend, if the end result is going to be a lack of consumer confidence in our product. We want to make sure that if these fuels are introduced into the market place, that consumers see the same high value, the same performance that they’re currently seeing. We don’t want to threaten the foundation of the industry.”
E85: Flex-Fuel Vehicles and Infrastructure
Another way of moving beyond the E10 blend wall is by increasing the use of E85 in the United States Fuels matrix. However, critics point out that only 1,300 out of 170,000 gas stations in the United States have E85 refuelling facilities. In addition, only 6 million out of 240 million vehicles are actually capable of running on E85 and most people that have a flex-fuel vehicle are not even aware that they have one. Bob Dinneen has a different perspective on the market for E85.
“U.S. automakers have indicated that by 2012, 50% of their automotives will be flexible fuelled. We purchase about 17 million vehicles per year in the United States. The U.S. automakers have about a 45% market share, which implies that by 2012, you’ll have an additional 4 million vehicles a year coming into the market place capable of running on these fuels. It won’t take very long, particularly if the foreign manufacturers also start producing flex-fuel vehicles before you hit what I would call a critical mass of 10 to 15% of the total vehicle fleet in the US. When that happens it’s going to be a lot easier to go to a gasoline marketer and say, convert one of your pumps. To do so today you’re asking him to convert one of his pumps for less than 2% of his consumer base, and only a fraction of those even realise they have the vehicle. The infrastructure will follow.”
Slow Consumption, accelerated RFS?
Even if flex-fuel vehicle market share would continue to grow after 2012 and the opportunity for higher blends opens up, the fact is that consumption, at a time that such issues are not yet having a significant effect, is lagging behind. Even though the RFA said at the start of 2007 that an expanded and accelerated RFS was not “the only tool in the toolbox” and that it “was not in the way to drive the biofuel agenda forward”, Mr. Dinneen illustrates how this year has been an eye opener in terms of market development. “In the beginning of this year an expanded RFS was probably not our top legislative priority. We wanted to see how the RFS was implemented, we wanted to make sure the market place could adapt to increasing volumes. We also were listening to our customers saying additional mandates aren’t really necessary, we are going to blend your product anyway. Indeed even the oil industry’s main trade association the American Petroleum Institute, had said quite clearly that ethanol markets would continue to develop and that they had recognized the value of ethanol and the mandates were not necessary. Well, quite frankly markets have not been opening up as rapidly as they should and many refiners and gasoline marketers have been leaving a significant amount of money on the table and have not blended ethanol where economics would certainly suggest that it made sense to do so.” The point is clear, a critical part of the supply chain is in the hands of an industry that will be cannibalized by growing ethanol consumption and even with economic incentives provided by the government, they are unwilling to blend the product. Mr. Dinneen probably illustrates his point best by mentioning how one oil company CEO was recently quoted as saying, “we will only blend as much ethanol as the government tells us to”. Subsequently, the RFA’s legislative priorities formulated at the start have now changed slightly. Referring to the oil company’s CEO quote, Mr. Dinnen says “we see that, we hear that, we see what’s going on in the market place and you than begin to think ok, maybe an expanded RFS does make sense.
RFS and the Energy Bill to pass in December?
However, an accelerated RFS is part of the new Energy bill, which has been significantly delayed in the United States Senate. As the RFS target for 2012, set at 7.5 billion litres, is likely to be met next year, will the decision be made in time to avoid oversupply? “Washington is a dysfunctional place right now,” Mr. Dinneen agrees, “and it is far more easy to stop legislation than to pass legislation. Having said that, I remain pretty optimistic that they’ll be able to get an energy bill done. I think $96 per barrel of oil is a powerful motivator for congress to act and people are very concerned that congress is not taking definitive action to address that tremendous challenge. Mr. Dinneen refers to a poll released last week showing that 74% of Americans want the US to utilize greater volumes of renewable fuels like ethanol and biodiesel, and more than 80% want the government to be actively engaged in promoting policies that support that.
“The congress reads those polls and I am reasonably confident, as much as anybody can confident about legislative action in Washington today, that there will be an energy bill before the end of the year.”, adding “I think it will happen sometime in December, and I am very confident that if there’s an energy bill, it will include an accelerated and an expanded Renewable Fuels Standard. One that is largely focussed on cellulose.”
© Ethanol Statistics 2008