Study: Ethanol Industry Must Go Back To E85 To Beat "Blend Wall"

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.