By on January 14, 2011

Recently the ethanol industry has “suffered” from a problem that epitomizes the problematic nature of government subsidies. Known as the “blend wall” this obstacle was created not by negligence on the part of the industry, but by the fact that its lobbying efforts have been far more effective than its marketing efforts. The problem, in a nutshell, is that the 2007 Renewable Fuel Standard mandates a steady increase in the amount of ethanol blended into the national fuel supply, from 9 billion gallons per year (BGY) in 2008 to 36 BGY in 2022… but with gasoline consumption falling and with standard pump gasoline capped at a maximum of ten percent ethanol (recently raised to 15% for vehicles built after 2007), the industry that’s supposed to get America off gas needs more gas to blend its ethanol into. As a study in the American Journal of Agricultural Economics puts it

Total national consumption of gasoline in the United States has been about 140 billion gallons in 2010 and is expected to fall over time due to increasing fuel economy standards. Thus, at present, if every drop of gasoline were blended as E10, the maximum ethanol that could be absorbed would be 14 billion gallons. In reality, 10% cannot be blended in all regions and seasons. Most experts consider an average blend of 9% to be the effective maximum, which amounts to about 12.6 billion gallons. U.S. ethanol production capacity already exceeds this level. Thus, our ability to consume ethanol has reached a limit called the blend wall.

The solution: well, the EPA’s ruling allowing 15% ethanol blends was supposed to fix the problem, but according to this report, that “fix” would only buy some four years before the industry is back to bumping against the blend wall. The solution?

With ethanol as the primary biofuel and either blend limit (E10 or E15), a substantial increase in E85 would be required to fulfill the mandate.

Do you remember E85? A few years ago, automakers like GM were deep into the “Flex Fuel” craze, touting the 85% ethanol blend as America’s opportunity to free itself from foreign oil dependence. But after the so-called “tortilla riots” in which Mexicans protested the rising cost of corn driven up by ethanol (not to mention a growing awareness of ethanol’s environmental costs) GM has become a far less vocal proponent of ethanol, as the Alliance of Automotive Manufacturers has even gone as far as to sue the EPA to stop E15 ethanol blends. And no wonder the enthusiasm for E85 in particular has taken a hit recently: not only does it use the most ethanol, thereby incurring the greatest impacts on food prices and the environment, but the EPA has even stated that

E85 needs to be priced competitively with (if not lower than) conventional gasoline based on its reduced energy content, increased time spent at the pump, and limited availability

And despite the huge government subsidies enjoyed by the ethanol industry, E85 simply isn’t priced anywhere near competitively. But the problem isn’t limited to the issues listed above either: E85 has to be so appealing to consumers that they choose to purchase a “Flex-Fuel” or E85-capable vehicle from the limited models that offer such capability.

Given the blend limits on E10 (or the blend wall), additional ethanol consumption can come from only E85. However, this leads to a new dynamic that further exacerbates the challenge. Unlike E10, which is a derived demand from gasoline, E85 acts as a substitute for E10 in equation. Thus, the effect of increasing E85 is to crowd out some of the ethanol used to blend E10, further lowering the E10 blend wall.

And the blend wall isn’t the only challenge: because E85 must be used to soak up the government’s ethanol mandates, there would also be a pump and Flex-Fuel vehicle (FFV) bottleneck as well. The study concludes that, even with E15 coming from from normal gas pumps

Ethanol in E15 consumption would grow from 13.1 BGY in 2010 to a peak of 19.7 BGY in 2016, before falling to 17.5 BGY in 2022, as the continued growth in E85 once again crowds out the use of the lower-blend fuel. By 2022, there needs to be around 90.4 million FFVs on the roads, served at 236,208 E85 dispensers. The total cost of installation for E85 dispensers and FFVs is $23.4 billion, or an NPV of $8.0 billion for this scenario. Thus, compared with the E10 scenario, the adoption of an E15 blending limit would reduce the consumption of E85 by 6 BGY in 2022 and lessen the demand for FFVs and E85 dispensers. This would save an NPV of $3.1 billion, or 28% of the Scenario 1 E10 NPV.

And who, pray tell, would bear the $8b cost of forcing Americans to buy a fuel they don’t want? Oh, and by the way, the study notes that

the cost estimates provided here are clearly underestimates of total cost

And if E15 is proven to be harmful to non-FFVs, we’re back to “scenario 1″ in which the “underestimated” cost rises above $11b. And all this is necessary only to make sense of a subsidized mandate that will cost taxpayers at least $6b per year next year alone. The ethanol industry has clearly gone down the government subsidy rabbit hole, and it’s time for the madness to stop.

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36 Comments on “Study: Ethanol Industry Must Go Back To E85 To Beat “Blend Wall”...”


  • avatar
    bumpy ii

    Dump the Exx blends and go straight for 100% ethanol. Treat it as a separate fuel like diesel, and give the pumps some wacky filler nozzle so people can’t put one in cars made for the others.

  • avatar
    dwford

    Politicians waste $billions on subsides, put up trade barriers and usage mandates, all to please primary votors in Iowa. Time for this waste to end!!

    Get over it people!! Plenty of Presidents have been elected even though they lost Iowa in the primaries.

  • avatar
    philadlj

    “Blend Wall”? Reminds me of the “Mineshaft Gap”…

  • avatar
    Steven02

    Obviously the solution to the E15 blend wall is E20.  Come on, you know that is what the Ethanol producers would want next.

    • 0 avatar
      Rod Panhard

      The other obvious solution is to allow people who use food stamps to buy corn-distilled whiskeys to go with their pasteurized-processed-cheese foods from Wisconsin.

  • avatar
    Zykotec

    Almost any car that has the possibility to adjust mixture and ingnition timing can use e85, and a lot of tuners are using it in Europe because of it’s cooling abilities, and ability to withstand knocking/pinging, It’s also cheaper than gas over here, so the increased consumption is not an economical problem. Why doesn’t Americans want it?

    • 0 avatar
      dwford

      Because the US ethanol industry is built up around corn. So in essence, we are burning our food, which raises food prices. So we are subsidizing an inefficient fuel and raising food prices at the same time. And now to increase the blending % to satisfy the lobby, I am sure the government is working on a new mandate to make all cars E85 compatible, which will raise the price of cars. it’s a total loser for the US taxpayer/consumer in every way. All to curry favor with a small group of people in a small state.

    • 0 avatar
      Felis Concolor

      Another problem is water, or ethanol’s hydrophilic nature, coupled with its nasty tendency to act as a solvent and dissolve many of the non-metallic components in the fuel delivery system. While a lot of modern automobiles have fuel delivery and filtering systems which can deal with the added moisture content, there are few automobiles in the 20 years old and up age bracket which were designed to handle these higher concentrations. As a lot of drivers are still happy with their decades-old rides, ethanol’s ability to turn a well running old car into a crusher candidate is deeply resented. In the small engine and marine field, resistance to ethanol is close to absolute, as water in the fuel lines is a Very Bad Thing for boaters.

      I became hip to ethanol’s possibilities through reading a lot of the hot rodding magazines I subscribe to. There have been many articles crowing about power building with ethanol blends, including mention of safely running 13:1 and higher compression ratios on the street along with the much greater fuel flow requirements due to ethanol’s lower energy density (so much for that “E10/85 improves fuel economy” argument). However, they also mention ethanol’s ability to dissolve carburetor floats (solution: invert the fuel bowl, remove the metering floats and ignore the metering windows) and the need for stainless steel filtering elements along with newer composite flexible lines when connecting all the metallic bits in the system. For racers and rodders, the added expense is a matter of course. For the “faster than you can walk” daily $#!+box driver, it’s a needless burden.

    • 0 avatar

      Yes, and additionally, industrial agriculture damages the environment, with pesticides and nitrogen getting into the rivers and streams, the latter largely responsible for the dead zone in the gulf of mexico.

  • avatar
    obbop

    Jumping upright, waving hands wildly above my head, shouting out with no one to hear but what does that matter to a shanty-bound crotchety Old Coot:  I have an opinion!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
     
    (great… let’s hope the old fart isn’t too verbose, I can envision those present mumbling/grumbling)
     
    The Disgruntled One will start this affair with an anecdote. Determination of the applicability of the following to the topic at hand is for you to determine.
     
    In a humble hamlet in a rural area of Nebraska sits a small manufacturer of aluminum pie plates and other food containers such as the type used for TV-type heat-and-eat frozen meals as seen in so many grocery stores across the land.
    Near the main production facility are a few nicely-kept metal buildings seldom entered.
    Inside are various machines that allow the creation of bodies for mortar shells. No explosives or fuses, just the outer casings that, if needed, are transported elsewhere for further assembly of crucial components.
    The firm receives a stipend to keep the machinery ready to commence manufacturing if needed to lob explosives at the “bad guys.”
    Assuredly there are other ready-to-go facilities scattered across the country.
    Could ethanol producing facilities be considered as part of the USA’s infrastructure in case of future need?
    We, the People, have paid for facilities to create a “strategic reserve” for oil in case of another oil embargo. How about those salt domes in the southern states that have been tapped into.
    Though those reserves are a temporary measure/supply I suppose they may be useful to temper fuel and price fluctuations.
    Then there are the capped oil wells ready to be accessed in case of foreign oil influx stoppages. Are there still some capped wells at the Elk Hills oil field in California?
     
    Well, it’s Ponder time(tm).
    Wheeeeeee!!!!!
    Envision a future with massive reductions or even the cessation of flowing oil from elsewhere. Hopefully our Canadian brethren, for economic reasons and/or our cultural bonds, would export their oil to us even during dire day but how about other foreign oil sources?
    Who knows what the future holds.
    What if suddenly we had to fall back upon ethanol for sheer survival?
    Eeeeeeeek!!!!!!!
    Admittedly, it would be costly and take time for a conversion to meet a “new reality” BUT……..
    With an infusion of billions of bucks and a MASSIVE nation-wide effort, public and private, We, the People, could make some conversions in so many parts of the national infrastructure to allow methanol to replace the lack of imported oil.
    Farm equipment and machinery that moves the food from source to end-user and to middle-people who convert edible raw materials into finished products that are sent to distribution points and then on to distribution points where further distributing gets the goods to where the consumer can grab enough food to at least keep us alive.
    Look to the Japanese who, during WW2 and especially towards the end of that affair when the “silent service” sank so many Japanese merchant ships that Japan was nearly “strangled.”
    Vehicles converted to creep along using charcoal as a fuel source.
    Where there is a will there is a way.
    With an available alternate fuel source and arduous effort and belt tightening and a must-do environment that back-up corn-likker-fuel could propel trains, boats and… I suppose, even planes but possibly only certain vehicle-types would be deemed practical to convert or build anew.
    Also, unlike today, time would not necessarily be “the essence” for travel time. Increased trans portion via barge using waterways in the “heartland” and elsewhere.
    The semi-trucks rushing across the land getting fresh veggies from California to New York City in three days would likely become an extreme luxury that is either scrapped or reduced for the truly extreme wealthy to get their fresh-from-the-field grub.
    Just something to consider, perhaps ponder.
    With an unknown future perhaps preparing some infrastructure now would ease future conversion cost and time needed.
    One of a horde of other considerations…. expenses now, what with building costs towards the “lower end” due to so many folks and firms begging for jobs (ignore statutes requiring union wages during these rough times…. a livable decent wage for the good of ALL should come first until the semi-free market can exert itself as the economy improves……. IF it ever does!!!!).
    Okay…..
    The long-winded shanty-bound rotund one who due to calorie dilution in the diet is not nearly as rotund when food was not such a large part of the personal economic equation is signing off.
    All the best to all and to all the ships at sea.

    • 0 avatar
      mikey

      @ obop….Y’a never cease to amaze me.

    • 0 avatar
      Zackman

      Wow. Can I get in line to have my Impala converted to camphor-burning? Necessity IS the mother of invention, after all. It sounds like our TTAC Poet-Laureate has read the book “War Day”! Amtrak may yet be a truly national system where one can travel leisurely and not worry about always finding where the next rest room is located down the road.

    • 0 avatar
      bunkie

      When I was a young boy, my mother told me stories of her life in Sweden during WWII. In one of them she described how the Swedes dealt with the shortage of gasoline. They attached trailers to their cars that had these wood-stove-like devices which were a kind of giant double-boiler. A firebox in the lower section burned wood. The upper section was heated by this and sealed so that no oxygen could get in. Put some logs in it and it gave off combustible gases which were piped into the carburetor to be burned (I’m a little light on the details).

  • avatar
    redmondjp

    If you think about this from the government’s standpoint, it makes a lot of sense.  Since we pay by the volume of fuel received and NOT by the energy content, anything that causes the consumer to use more fuel by volume is good for the federal and state governments, due to the increase in per-volume fuel tax revenue that would be generated.

    Not even mentioning the abysmal fuel economy that one gets while using E85 – I’d love to see a mandatory requirement on the EPA sticker in the showroom to publish the fuel economy numbers one would get by running E85.  That would be a deal-killer for most consumers so you know it will never happen.

    I complete agree that from a consumer standpoint we are being screwed both at the pump and at the grocery store (which is now often the same place ie Costco, Sam’s Club, Safeway, etc)

  • avatar
    snabster

    Ed, don’t watch too much Fox news.  It will eat your brain.
     
    Is any government regulation imperfect?  Of course!  But it is balance — and the real question is do the benefits outweigh the costs.
     
    And of course the easy answer too all of this is raise the gas tax.
     
    But let me point out three numbers which are more interesting:
     
    1.  Us gasoline usage: 140 billion gallons a year.  Rough math:  that is about 9 million b/d of oil.  The US uses about 20m b/d.  Yes kids, the rest is COMMERICAL.  Throw in pickup trucks being used for business and the actual US consumer is using even less — maybe 6m b.d.
     
    2.  Corn supplies — at an all time low.  Most corn in the US now being used for fuel, not animal feed.  Is it better to use it as fuel — and save ourselves from imports, or turn it into animals which we can sell to China?  I’m not sure.
    3.  Suggests the answer is really bio-diesel, not more ethanol.  1/2 our crude oil demand is from diesel.  We’ve got the low hanging fruit — e10.  Limited push of E85 makes some sense.  Federal investment in pipelines?  Tax subsides for more pumps?  Fleets (post office?)

  • avatar
    mistercopacetic

    If the national supply of ethanol exceeds the current demand why don’t we export it?

    • 0 avatar
      vww12

      B/c no-one would purchase expensive US ethanol when tropical countries produce ethanol at 1/4th the price (i.e., Brazil).
      In fact, Brazilian ethanol is so cheap that the U.S. government imposes a very high tariff on it so that it is uneconomical for U.S. refineries to purchase from that cheap source instead of expensive U.S. stuff.
      See, U.S. ethanols get a trifecta that no other subsidized industry gets:
      + subsidy in the form of a tax credit (forget about tax deductions, those are for losers)
      + protection from competition in the form of a high tariff on imports
      + mandate to use in the form of a minimum blend mandate
       
      You are being robbed from your left back pocket, right back pocket, and front pocket all at the same time!

    • 0 avatar
      George B

      In my opinion, the solution to the corn ethanol “liquid pork” problem is to flood the market with cheap sugar cane ethanol and kill the corn ethanol industry dead.  Imagine a bilateral trade agreement between the US and Brazil where they get to sell us sugar and ethanol duty free in exchange for the US getting to sell cars to Brazilians duty free.  We would get soft drinks with real sugar, price competitive ethanol, and Brazil gets cars built in the US without the extra import car tariffs.

  • avatar
    Carlson Fan

    “1/2 our crude oil demand is from diesel”

    If that’s true it’s a really intersting fact. The day oil becomes soo expensive that shipping food, materials and products all over the world becomes cost prohibitive, will be a good day. We need to get back to a world where things, especially food, are grown and distributed locally. It may a be a little more expensive but the benefits will be worth it by a long shot.

  • avatar
    ixim

    Repeal the subsidy, repeal the E10/E15 requirements, put back the old corn price supports as needed; ethanol has never made sense, even from a national security standpoint.

  • avatar
    jjster6

    Let’s just mandate the use of Unicorn tears and Wearwolf farts as a vehicle fuel.  Problem solved.

  • avatar
    grzydj

    Let’s open up the ethanol industry to the free trade that we so lovingly like to promote in the US. Let Brazil bring in all that they can for next to nothing so farmers have to find more ways to be competitive at the same time.

  • avatar

    Isn’t it wonderful how funny the absurd can be
    I think I’m going to ahve a special EPA-like fuel economy sticker made for my Honda giving my observations on gas mileage, and for comparison, the E85 economy. I can just imagine the perplexed PC Cantabridgians crowding around my Honda.

  • avatar
    GS650G

    Leave it to government to mandate we use more of something than the market demands. So what happens if we don’t use 36 billion gallons a year,  are we sent to bed without desert?

    “2007 Renewable Fuel Standard mandates……”

    By what authority and who’s expense? Ask those questions enough and we might get somewhere.

  • avatar
    Eric_Stepans

    I seem to recall reading a decent book and seeing a good movie about this subject….;-D….
     
    http://www.thetruthaboutcars.com/2009/03/the-truth-about-fuel-pt-2-meths/
     
    http://www.thetruthaboutcars.com/2009/03/the-truth-about-fuel-pt-3-victory/

  • avatar
    thx_zetec

    I dis-agree with many comments above.  The point is not the best way to deal with a stupid, wasteful law (the ethanol mandate, AKA our version of the Soviet five year plan).   The best thing is simply get rid of this mandate, which I predict will never be met.
     
    Look at President Carter’s synthfuels program.  Wasted tens of billions (back when a billion was a lot of money) and produced no significant energy.  A total boondoggle (sorry about picking on a Democrat, the Republicans are just as good as making deficits).
     
    Next exhibit is the mandate for x-gallons of cellulosic ethanol on y-date.   No way we’ll make this goal.   Just google “cellulosic ethanol mandate”.
     
    The goals of the ethanol mandate are high enough that they could never be met without much, much, much higher subsidies and even bigger boon-dogglier mandates.
     
    If the Tea Party comes out favoring repealing the whole mess I would much appreciate this.

  • avatar

    I knew ethanol was a total joke when George Bush Jr. had his hand on an ethanol pump
    and proclaimed that “This is the future!”   He knew that his oil buddies would not produce
    one drop less of oil on account of this important development, because it takes a gallon of
    oil to produce a gallon of ethanol.
     
    I hate the way my car runs on the stuff.  I get MUCH better gas mileage when I can find
    pure gasoline.
     
    Shame on Obama for perpetuating this hoax on us.  Guess you gotta pay back the Archer Daniel  Midland people for flying him around in a Learjet when he was on the campaign trail.  Goddamnit!
     


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