Ethanol allegiance no longer of primary importance for candidates
As the Iowa caucuses shape up for February, one thing is becoming clear: Support for ethanol is no longer a sine qua non for aspiring presidential candidates.
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EPA’s ethanol ruling pleases no one
Nobody is happy with the EPA’s ruling on ethanol’s Renewable Fuel Standard made last week. The agency finally published its numbers after dodging the issue for two years and falling far behind on its legal obligations.
“It’s Christmas in May for Big Oil,” said Republican Sen. Chuck Grassley of Iowa. “President Obama’s EPA continues to buy into Big Oil’s argument that the infrastructure isn’t in place to handle the fuel volume required by law. What happened to the president who claimed to support biofuels? He seems to have disappeared, to the detriment of consumers and our country’s fuel needs.”
Gov. Terry Branstad of Iowa, also a Republican, was not quite so negative. “We are disappointed that the EPA failed to follow the renewable volume levels set by Congress,” he said. “But we’re encouraged that the agency has provided some stability for producers by releasing a new RFS proposal, and made slight increases from their previous proposal.”
Even the question of whether the EPA’s new standard represents an increase or a decrease in the required amount of ethanol is under dispute. The original law, passed by Congress in 2007, specified that oil refiners were to absorb 14 billion gallons by 2013, 17 billion by 2014 and 19 billion this year. By 2013, however, it became obvious that the country would be unable to absorb 14 billion gallons without spilling over the “blend wall,” the standard of 10 percent ethanol that’s blended into virtually all gasoline in the U.S. There are concerns that some older vehicles can’t handle higher ethanol blends beyond E10 without sustaining damage to parts.
“By adopting the oil company narrative regarding the ability of the market to effectively distribute increasing volumes of renewable fuels, rather than putting the RFS back on track, the Agency has created its own slower, more costly, and ultimately diminished track for renewable fuels in this country,” Bob Dinneen, president and CEO of the Renewable Fuels Association, said in a statement.
The critics seem to have a point. Blends of E15 (up to 15 percent ethanol) and E85 are being sold across the country without any difficulties. Cars built since model year 2001 are approved to run on E15, and about one-third of automobiles are now flex-fuel, meaning they can tolerate any ethanol blend, up to E85. But the EPA has stuck with the “blend wall” in order to accommodate the oil refiners and automakers, who say they will not honor warranties on engines that might be damaged by ethanol.
The EPA standards announced last week are: 15.93 billion gallons for 2014 (that approximates actual sales for that year), 16.3 billion for 2015 and 17.4 billion for 2017. All these figures are about 5 billion gallons below the original statutory requirements. The last two have caused the most controversy. Ethanol supporters say the EPA is bound by the number in the 2007 law — even though there is a waiver provision. But critics who want to cut back on ethanol use argue that the figure is actually increasing from year to year and is only considered a reduction because it doesn’t match the original projections if 2007.
Really, it’s kind of ridiculous to think that Congress could predict exactly how much ethanol could be sold eight years hence. Typically, they made straight-line projections and assumed that gasoline consumption would hit 160 billion gallons per year by this time and keep going up. In fact, gasoline consumption started to drop almost the minute Congress passed the law, resulting from both improved fleet mileage and the reduction in driving that came with the recession. It now stands at 140 billion gallons. Had the law simply specified that ethanol consumption should be 10 percent of all gasoline consumption, there would be nothing to argue about.
The other place where the law is completely out of whack is in the mandates for non-corn ethanol made from cellulosic materials. At the time it was anticipated that cellulosic ethanol was right around the corner, and Congress specified that consumption should be 3.75 billion gallons in 2014, 7.2 billion gallons by 2017 and 21 billion gallons by 2022. In fact, the cellulosic-ethanol industry produced only 1.9 billion gallons in 2014 and has not increased much since. At one point, the EPA was actually fining oil refiners for not using a fuel that didn’t exist.
There’s little reason for either Congress or the EPA to be meddling in the ethanol market. Ethanol has established itself as an oxygenator and high-octane additive since the banning of MTBE. It would probably be added at a rate of around 10 percent, even without the mandates. E85 has a big price advantage over gasoline and would sell more if it were available. Last week, on the same day that the EPA published its new proposed Renewable Fuel Standard benchmarks, the Department of Agriculture pledged to match state funds for $100 million for the construction of new fueling stations designed to dispense E85. The fuel is very popular in the Midwest and would probably attract customers in other areas if it were easily accessible.
Finally, an export market for American corn ethanol is starting to take shape. Brazil mandates 35 percent of its fuel must be ethanol, but it has had problems with its sugar harvest and has started to import from the U.S. Europe is also getting big on ethanol and is looking across the Atlantic for new supplies.
Ethanol has proved its worth as a fuel additive and possibly as a gasoline substitute as well. All the sturm and drang over the EPA mandates have very little to do with the future of the industry.
Ethanol industry eagerly awaits EPA ruling
June 1 will mark the day when the Environmental Protection Agency finally gets around to issuing its new requirements for the Renewable Fuel Standards Act, after a delay of more than two years.
The EPA found itself between a rock and a hard place in 2013, when declining gasoline consumption pushed the ethanol production value specified by the 2006 act over the “blend wall” — the 10 percent mark at which ethanol mixture allegedly surpasses the 10 percent threshold for E10 blended gasoline. This can be a problem, because higher concentrations of ethanol are only approved in relatively newer vehicles.
The EPA punted in 2013, then again last year. Now at least the EPA seems ready to resume its responsibilities. The agency sent its proposal over to the White House Office of Budget and Management earlier this month, but no word has leaked out. The June 1 proposals will not be finalized until November.
Some biofuels producers argue that the agency should push past the 10 percent blend wall. The EPA has already approved E15 — a blend of up to 15 percent ethanol — for light duty vehicles, including trucks, SUVs and cars, made in model year 2001 and since then. Flex-fuel vehicles can also tolerate blends of up to E85. But there are questions about whether some older vehicles built before 2001 could potentially be harmed by higher blends. Automakers have threatened to void warranties for these cars if they use ethanol blends higher than E10.
The oil industry, which opposes raising the RFS, argues that the infrastructure for distributing blends higher than E10 does not exist and would be very expensive to put into place. Outfitting a gas station with E15 and E85 pumps brings added cost. Since 95 percent of gas stations are owned by independent operators, the chances that they will make this investment are very slim. Oil company and gas station operators say it is the biofuels industry that should make this investment. No one has been able to resolve this stalemate.
The EPA’s decision will come at a time when things are looking up for the biofuels industry. The Energy Information Administration recently announced that biofuel production hit 14.3 billion gallons last year, the highest output ever. Moreover, this increased production has been driven by new technologies. “If ethanol plant yields per bushel of corn in 2014 had remained at 1997 levels, the ethanol industry would have needed to grind an additional 343 million bushels, or 7% more corn,” reports Energy Global.
“To supply this incremental quantity of corn without withdrawing bushels from other uses would have required 2.2 million additional acres of corn to be cultivated, an area roughly equivalent to half the land area of New Jersey.”
Improvements in ethanol’s productivity have come from:
1) Larger-scale operations that have allowed better process technology such as finer grinding of corn to increase starch conversion
2) Better temperature of fermentation, which optimizes productivity
3) Better enzymes and yeast strains used in the process
Much of this extra production has been absorbed by revving up exports. U.S. ethanol exports reached an all-time peak of 1.087 billion gallons in 2011-2012, then slumped to 554 million gallons in 2012-2013 but bounced back to 792 million gallons in 2013-2014. This year exports are once again up 9 percent and may approach the 2011-2012 record.
Canada is our largest export target, but most of the ups and downs depend on what is happening in Brazil. That country has a mandate of 27 percent ethanol — mostly from sugar cane — but high sugar prices have cut into Brazilian production, and 70 refineries have gone out of business. Therefore Brazil has become more dependent on American corn ethanol to fulfill the requirements. As a result, the U.S. has been a net exporter of biofuels for the last five years.
Ethanol producers are also making progress in making the higher blends more recognizable and acceptable to motorists. American Ethanol just celebrated a five-year partnership with NASCAR that resulted in the circuit’s race cars running on E15.
“This has been a tremendous partnership,” Tom Buis, CEO of Growth Energy, told AgriNews. “We are thrilled to help NASCAR in its green efforts and NASCAR’s high-performance racing has been the perfect validator for E15, a cleaner burning fuel that is less expensive and has a higher octane content, which improves performance.”
Biofuels advocates claim the use of E15 has reduced greenhouse gas emissions by 20 percent over the 7 million miles traveled by the race cars in the last five years.
In Rensselaer, Indiana, the Iroquois BioEnergy Co. has opened a retail gas station that will offer ethanol blends E10, E15, E30 and E85. The station was partially funded by an Indiana Corn Marketing Council Flex Fuel Infrastructure grant.
“We want to use this pump to show the public the economic advantages of higher ethanol blends,” said Gunner Greene of Iroquois BioEnergy. “Our intent is to target those with flex-fuel vehicles who may not have a thorough understanding of the advantages of those vehicles.” The company was surprised to discover that 75 percent of its initial sales were for E85, with E30 coming in second place. They did not expect the demand for the higher blends to be so solid. The Corn Marketing Council has plans to fund 16 more flex-fuel stations around the state.
If the EPA approves the use of E30 and higher blends for nearly all cars, the country will probably be able to absorb the industry’s higher output. If not, exports may still pick up the slack. Either way, the ethanol industry is in much better shape than is commonly credited.
Non-food-based ethanol scaling up to succeed corn
Biofuels have been taking their lumps lately. After almost seven years of controversy, the European Parliament has acted to limit the amount of biofuels that can be garnered from land that could be used to grow food.
The EU has set itself a goal of getting 10 percent of its transport fuel from biofuels by 2020. Last week the Parliament voted to reduce this to 7 percent. The concern is that biofuels are taking food out of people’s mouths. Biofuels are also accused of leading to deforestation, both in Europe and in countries such as Brazil and Argentina, where Amazon rainforest and Argentinian pampas are being put under cultivation for growing biofuels for export.
“Let no one be in doubt, the biofuels bubble has burst,” Robbie Blake of Friends of the Earth Europe said in a statement. “These fuels do more harm than good for people, the environment and the climate. The EU’s long-awaited move to put the brakes on biofuels is a clear signal to the rest of the world that this is a false solution to the climate crisis. This must spark the end of burning food for fuel.”
Ironically, it was soft-energy guru Amory Lovins, who at the time was British representative of Friends of the Earth, who originally suggested the biofuels idea in his 1976 book, Soft Energy Paths. Lovins used an elaborate comparison with the beer and wine industry to show that it would be possible to produce a good one-third of the United States’ gasoline requirements through biofuels. Unfortunately, Lovins did not take account of the amount of land that would be required to grow these crops. This oversight has dogged the biofuels effort ever since.
In the U.S., criticism is mounting as well. A study published last month by researchers at the University of Wisconsin-Madison shows that corn and soy crops for biofuels are expanding into previously un-farmed prairie land in the Midwest. Using high-resolution satellite photographs, the authors identified the expansion of cropland from 2008 to 2012, the four years following the passage of the Renewable Fuels Act that mandated the use of biofuels. The authors estimate that 40 percent of the corn crop grown in the U.S. is now used to make ethanol for use in vehicles. Ironically, environmentalists who originally celebrated ethanol are among its biggest detractors.
So does this mean that American biofuels will soon be facing the same limitations they’ve encountered in Europe? Probably not. The reason, once again, is technology.
From the beginning, the dream of biofuels enthusiasts has been that ways could be found for breaking down the refractory cellulose molecule and turning it into basic sugars that can be synthesized into ethanol. This is a very difficult task. It can only be accomplished in two ways: 1) heating corn stover and other cellulosic materials to a very high temperature, which consumes more energy than is produced; and 2) taking advantage of bacteria in the guts of cows and termites that can break down cellulose. These bacteria are highly temperamental, however, and have proved to be extremely difficult to cultivate on a commercial scale.
Nevertheless, progress has been made, and there are several commercial operations now approaching successful operations. Among them are:
• Abengoa Bioenergy (Hugoton, Kansas). This Spanish company’s cellulosic-ethanol facility came online in 2014 and is expected to produce 25 million gallons per year from corn stover, wheat straw, milo stubble and switchgrass.
• DuPont (Nevada, Iowa). Its 30 million-gallon-per-year cellulosic plant is scheduled to begin production this year. The plant will get corn stover from 500 farmers who are participating in the company’s Feedstock Harvest Program.
• Poet-DSM Advanced Biofuels (Emmetsburg, Iowa). Co-funded by a Dutch company, Project Liberty opened in September 2014 and is producing ethanol from corn cobs, leaves, husk and stalk. It is shooting for 25 MMGY.
• Quad County Corn Processors (Galva, Iowa) started production last year. Its Quad County facility can produce 2MMGY. The company says its patented technology has the ability to generate 1 billion gallons per year, without consuming any more corn, by adding bolt-on technology to existing corn-ethanol refineries.
So ethanol is not standing still. The EPA is expected to issue its renewable fuel standard sometime next month, after dodging the issue for two years. The threshold likely will be below the 14 billion gallons that was originally scheduled for 2014. But the law’s requirement for Gen-2 biofuels has barely been scratched, since these cellulose efforts have not borne fruit to date. With cellulosic operations now gearing up, it appears that ethanol may be ready to take on a second life.
(Photo: Corn-stover harvest. Posted to Flickr by Idaho National Laboratory)
Ethanol has outgrown the Renewable Fuel Standard
Everybody knows that investing in ethanol right now is a bad bet. The logic is simple: The national average price for a gallon of regular gasoline was $2.45 on Thursday, down about 30 percent from this time last year. Ethanol prices have dropped as well.
On top of that, you have the uncertainty of whether the EPA will ever issue a Renewable Fuel Standard for 2014, let alone 2015. Marin Katusa, chief energy investment strategist for Casey Research, is warning investors:
[Warren] Buffett would tell you, if you asked him, that an investor should absolutely avoid the ethanol market in the current market. Why? Because of his two rules:
1. Don’t lose money.
2. Don’t forget rule #1.
Yet if the ethanol effort is about to run out of gas, how do you account for stories like this:
Ethanol industry pretax profit estimated at $7.8 B for 2014 (Ethanol Producer magazine)
The U.S. ethanol industry came off its best streak of profitability in January, one that ran 95 consecutive weeks without a loss for the model Iowa plant used to estimate and track industry profitability. … University of Illinois economist Scott Irwin presented his analysis of ethanol profitability in a recent FarmDocDaily post, “2014 really was an amazing year for ethanol.”
Ethanol plant stays profitable in challenging times (Farm and Ranch Guide)
Changing over from powering Red Trail Energy LLC with coal to using natural gas is a major step forward for this ethanol plant in southwestern North Dakota. With the changeover from coal to natural gas in March, the plant will be able to produce more ethanol, according to Gerald Bachmeier, CEO of Red Trail Energy LLC. … “We’re excited about the change and the opportunity to reduce our carbon footprint,” he said.
Pacific Ethanol reports 2014 was a record year (Ethanol Producer)
Pacific Ethanol Inc. has released 2014 financial results, reporting record net sales, gross profit, operating income, adjusted EBITDA and gallons sold. Neil Koehler, CEO of Pacific Ethanol, called 2014 a pivotal year and stressed that the company met and exceeded all of its goals for 2014. Shares of Pacific Ethanol were up 23.4 percent at $11.51 Thursday afternoon.
Something is going on in the ethanol industry that commentators haven’t quite grasped. I would put it this way: The industry has matured to the point where it doesn’t much matter how much ethanol the government says we have to consume. The industry has outgrown the Renewable Fuel Standard.
Here’s another headline that indicates what’s going on:
Louis Dreyfus ships big U.S. ethanol cargo to Middle East traders (Reuters)
Louis Dreyfus Commodities has shipped a large cargo of U.S. ethanol worth $17 million to the Middle East traders said, stoking hopes among U.S. producers of renewed appetite from some buyers overseas. Dreyfus, one of the world’s largest commodities merchants and a major ethanol player, is sending 280,000 barrels of ethanol from the Port of New York to Jebel Ali in the United Arab Emirates, where it will be blended into gasoline for Iraq, according to four traders familiar with the move.
This followed on a February 27 report that Dreyfus had also shipped 3.56 million gallons by tanker to Brazil, which is the world’s leading consumer of biofuel.
“Consumption was surprisingly high last year and now mills must refill inventories,” Mauricio Muruci, an analyst with Porto Alegre, Brazil-based research firm Safras & Mercado, told Bloomberg. Brazilian ethanol demand jumped 15 percent to 5.41 billion gallons last year, the highest level since 2010, data from Sao Paulo-based sugarcane group Unica show. Ethanol, produced from corn in the U.S. and sugarcane in Brazil, is used as a transportation fuel undiluted or in a blend of 25 percent of the biofuel and 75 percent gasoline in the Latin American country.
So American ethanol is filling gas tanks in Iraq. It is replenishing inventories in Brazil, which uses more ethanol than any other country. Is there any doubt that there is a world market for this product?
The opening of world markets comes just at the time when the impracticality of the Renewable Fuel Standard is becoming too difficult to ignore. Senators Diane Feinstein (Democrat of California) and Pat Toomey (Republican of Pennsylvania), a kind of east-west alliance, have introduced a bill ending the Renewable Fuel Standard altogether.
This past weekend at the annual Iowa Ag Summit, a passel of Republican presidential hopefuls addressed the ethanol issue, and none of them was very enthusiastic. This contrasted starkly with the usual kowtowing to Iowa farm interests that characterizes the run-up to the Iowa caucuses, the first official event of the primary season. In 2012, both Newt Gingrich and Mitt Romney, who had publicly opposed ethanol subsidies, buckled under pressure and supported ethanol. That may not happen this time around. With several candidates opposing the RFS — and with Iowa mattering less and less to Republican Presidential hopefuls — the group may get up the courage to defy the state on the issue.
And the question must be asked: “Does it really matter?” Corn-bred ethanol seems to be doing very well despite the falling price of gas. And there is this report out of the University of Illinois:
A recent study simulated a side-by-side comparison of the yields and costs of producing ethanol using miscanthus, switchgrass, and corn stover. The fast-growing energy grass miscanthus was the clear winner. Models predict that miscanthus will have higher yield and profit, particularly when grown in poor-quality soil. It also outperformed corn stover and switchgrass in its ability to reduce greenhouse gas emissions.
It’s obvious the industry is still maturing. Iowa farmers may be much better off growing miscanthus on marginal land while sticking to their normal rotation of corn and soybeans. And as long as there are cars on the road, there will always be a market to buy it.
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[Disclosure: On the basis of research for a previous Fuel Freedom article, the author recently purchased a small holding of Pacific Ethanol stock. So far he is happy with the investment.]
Ethanol at the crossroads
During an 18-month stretch, from June 2013 to December 2014, American-made ethanol was riding high. The industry produced 13.9 billion gallons and was making 63 cents per gallon, for an annual profit of $8.8 billion.
Then oil prices collapsed. The results have not been good for ethanol. Sales have been squeezed and profit margins have almost disappeared entirely. Ethanol producers must keep their price below the rate of gasoline, and that has become difficult. After gasoline fell below $2 per gallon in some places, ethanol was squeezed right out of the market. Instead of buying ethanol, refiners purchase Renewable Identification Numbers (RINs), which give them credit for putting ethanol into their blends. RINs have gained 36 percent in the past year, to 71.9 cents a gallon on the New York Mercantile Exchange, which shows how they have become a popular method of avoiding ethanol purchases.
As a result, major refiners are either throttling back or closing some of their higher-cost operations completely. The Valero Energy Corporation and Green Plains Renewable Energy, which together make up about 15 percent of U.S. ethanol capacity, have reduced their operations, according to Bloomberg. At a typical mill in Illinois, profit margins have virtually vanished after netting $1.33 per gallon only a year ago, according to AgTrader Talk, an Iowa consulting company. As a result, U.S. ethanol output fell 4.6 percent to an annualized rate of 14.5 billion gallons, from a record of 15.2 billion gallons, for the week ending Feb. 20, according to the Energy Information Administration.
All this illustrates how vulnerable ethanol will be if the Environmental Protection Agency ever gets around to publishing its “renewable fuel mandate” for last year or this. The EPA is supposed to issue a number each year for the amount of ethanol that will be incorporated into gasoline sales, in accordance with a 2007 law. But last year, with gasoline consumption actually declining because of economic weakness and improved fleet mileage, it became obvious that ethanol consumption could not reach the mandated level of 14.2 billion gallons without going over the mythical “blend wall” of 10 percent, at which point ethanol might damage some older engines. Most cars sold since 2004 can tolerate higher blends, and there are pumps where 85 percent ethanol is available. Still, the EPA has remained reluctant to abandon its conservative position and has tried to reconcile the 10 percent figure with declining gasoline consumption. Even the current 14.5- billion-gallon annual target would exceed the blend wall, and the EPA is in danger of sticking the country with too much ethanol. Inventories already stand at 21.6 million barrels, the highest level since 2012.
Added into all this is the price of corn, which remains the most widely used feedstock for U.S.-made ethanol. Last year the price of corn reached $8 per bushel and averaged $4.43 for the year. Ethanol refiners were still able to absorb the price because gas prices remained so high. But now gasoline prices have fallen by 50 percent, while the price of corn has only declined 19 percent, to $3.75 per bushel. Ethanol refiners say corn must reach $3.25 per bushel before they can make any money.
Chuck Woodside, CEO of KAAPA Ethanol and former president of the Renewable Fuels Association, says 2015 is looming as a critical year for ethanol. “We’re coming off a phenomenal 2014, and the industry as a whole did well,” he told the Kearney (Neb.) Hub newspaper. But “there are a lot of things yet to be determined about 2015.” Among them are how much drivers will increase their gasoline consumption (taking advantage of lower prices); whether more E15 and E85 pumps can be installed around the country; and whether the EPA will ever make up its mind on the Renewable Fuel Standard. There is even some question now of whether the EPA or Congress has the authority to set the RFS.
“The price of diesel has not fallen commensurate with the price of oil,” Woodside added. That only drives up the costs for ethanol plants, which use diesel-burning trucks and railroads to transport the product.
One bright spot has been the export market, in which American ethanol has been gaining ground. Demand has come particularly from Brazil, where 25 percent of all vehicles must run on 25 percent ethanol. Brazil has been under pressure to slow deforestation in the Amazon Basin, where most of its sugarcane ethanol is produced. China has also been a growing market for American ethanol products.
But refiners now agree that the best solution to the ethanol surplus would be to increase the number of pumps around the country that can dispense the E85 blend. That would produce a demand that would easily absorb all the ethanol American refiners could produce.
Why are the Koch brothers buying up ethanol plants?
Flint Hills Resources, a biofuels company owned by the corporation controlled by brothers Charles and David Koch, has purchased its seventh ethanol plant.
This week Flint Hills completed its acquisition of the plant near Camilla, Ga., from Southwest Georgia Ethanol. According to Flint Hills’ press release, the plant produces about 120 million gallons of ethanol a year and employs about 60 people.
As the Wichita Eagle notes, Flint Hills is now one of the largest ethanol producers in the country. Its biofuels business …
… has a combined annual capacity of 820 million gallons of ethanol, a biodiesel plant and investments in biofuels technology and feedstock development.
Considering that the entire ethanol industry produced 13.3 billions of fuel in 2013, Flint Hills now controls 6.2 percent of the U.S. market. Pretty substantial for an enterprise owned by Koch Industries, which made the bulk of its vast fortune on oil.
The Kochs are hardly greenies. According to a Rolling Stone story from last September:
Thanks in part to its 2005 purchase of paper-mill giant Georgia-Pacific, Koch Industries dumps more pollutants into the nation’s waterways than General Electric and International Paper combined. The company ranks 13th in the nation for toxic air pollution. Koch’s climate pollution, meanwhile, outpaces oil giants including Valero, Chevron and Shell. Across its businesses, Koch generates 24 million metric tons of greenhouse gases a year.
A 2011 story by the Center for Public Integrity contends that while oil is the “core of the Koch business empire,” its influence extends much further.
Koch companies trade carbon emission credits in Europe and derivatives in the U.S. They make jet fuel in Alaska from North Slope oil, and gasoline in Minnesota from the oil sands of Canada. They raise cattle in Montana and manufacture spandex in China, ethanol in Iowa, fertilizer in Trinidad, nylon in Holland, napkins in France and toilet paper in Wisconsin.
Since federal guidelines call for a certain amount of ethanol to be blended into the nation’s gasoline supply, investing in ethanol might be a simple hedge, the story says.
“New or emerging markets, such as renewable fuels, are an opportunity for us to create value within the rules the government sets,” Flint Hills Resources President Brad Razook told his employees …
Does ethanol have to be hurt by falling gas prices?
Jim Lane, editor and publisher of Biofuels Digest, is one person who thinks alternative fuels aren’t necessarily going to be hurt by the huge drop in the price of crude oil.
In a post on the Digest Jan. 6, Lane lays out the rather complicated case of why it doesn’t pay right now to be dumping your alternate-energy stocks. That’s been the reaction so far to anything related to the price of oil. But Lane says there are special aspects of alternatives like ethanol that will be affected in a different way.
In the first place, Lane notes that while crude oil prices have been falling, ethanol prices have been falling, too. Since last June, crude oil has fallen from $115 a barrel to under $50, a remarkable 60 percent drop. Yet ethanol has fallen as well, from $2.13 a gallon to $1.55 a gallon, a formidable 27 percent drop. This is due mainly to the falling price of corn, which has been at its lowest level in recent years. A bushel of corn fell over the same period from $4.19 a bushel to $3.78, a 10 percent drop. In this way, ethanol is only marginally dependent on the price of oil and can show its own price pattern.
One thing worth noting is that there is a certain amount of elasticity in American driving. People tend to increase their driving range when the price of gasoline goes down. This is particularly true when it comes to taking vacations, which tend to be a long-term planning effort. If the price of gasoline stays down through next summer, people are more likely to increase gas consumption. The fact is that gasoline demand has actually reached its highest point in the last few months since the price of oil began to fall, as the following graph indicates:
Now drivers are required to include 10 percent ethanol in each gallon of gas. Therefore, ethanol has a fixed market. Driving has been declining in recent years, which is one reason that the Renewable Fuel Standard has been under fire – because the absolute amount of ethanol required has exceeded the 10 percent requirement in relation to the amount of gasoline consumed. Refiners and oil companies must buy this amount of ethanol. This is the reason the Environmental Protection Agency has been holding back on setting an RFS for 2014 — because the original amount prescribed was going to exceed the 10 percent figure. If people start taking advantage of lower gas prices and start consuming more gasoline, the amount of ethanol required will grow. “(W)e should be seeing a 2+% increase in gasoline demand, and that will take some pressure off the ethanol blend wall,” Lane writes. It might make EPA’s decision easier, if it ever gets around to setting a number.
Just to emphasize this point, an RIN — Renewable Index Number — is required by the EPA to prove that a refinery has been adding ethanol up to the 10 percent mark. The price of RINs has actually been rising as gas prices have fallen. As Lane writes: “Part of the reason that the ethanol market is holding up relatively well in tough times is the impact of the Renewable Fuel Standard, and its traded RIN system. RIN prices have jumped as oil prices have slumped — and a $0.76 increase in the RIN value of a gallon of fuel is a striking increase in value.”
So all is not dark for the future of alternatives. Ethanol’s place is secure, despite the fall in gasoline prices. Remember, it’s not that demand for gas is falling, but people are spending less for what they get. If methanol is given a chance, it might turn out to be more invulnerable, since it’s not tied to corn prices but to natural gas, which we seem to have in even greater abundance than oil. Electric cars also don’t lose their appeal, since much of their appeal is getting off gas entirely and unbuckling from the oil companies. It may not be time to abandon your stock in alternative energies quite yet.
Can ethanol benefit from a drop in oil prices?
A new school of thought has emerged that ethanol may actually benefit from the recent fall in oil prices, to nearly half their level of a few months ago.
The main exponent of this theory is Andrew Topf, writing on OilPrice.com. His logic is sound, and there are a few recent developments to back him up. It isn’t a sure thing, but there is a strong possibility that ethanol could emerge from the current oil price plunge as a winner.
Here’s the argument Topf makes: He acknowledges that ethanol prices have fallen along with gas prices, so the market doesn’t look very promising. Also bedeviling the industry is the foot-dragging by the Environmental Protection Agency, which has not yet set a renewable goal for ethanol for 2014. The EPA is supposed to set a number every year that specifies how much corn ethanol will be consumed. This is supposed to be enough to meet the 10 percent standard that ethanol is supposed to meet in replacing gasoline every year.
Buffeted by this uncertainty, however, the industry has taken its own initiative and started exporting ethanol. To its surprise, the market has proved very favorable. Canada, the Philippines and Japan have all proved to be receptive to the idea of stretching their gasoline supplies with ethanol. Green Plains, Inc., one of the major U.S. producers, is going to export 15 percent of its product in the fourth quarter of 2014. “We are booking export sales into 2015, extending into the third quarter of next year,” Green Plains president and CEO Todd Becker told investors in a conference call in October. “We typically have not seen export interest that far out in the future.”
The U.S. has pursued contradictory policy on ethanol from the beginning, giving the encouragement of the 10 percent mandate, coupled with subsidies and tax breaks going back to the 1990s. Then became President Bush’s mandates, which guaranteed a market for ethanol through 2023 and also specified a market for cellulosic ethanol, which has never materialized — even though the EPA has charged refiners for a product that didn’t exist.
So what will happen with ethanol amid falling oil prices? One straw in the wind came in South Bend, Indiana, where a corn ethanol plant that had been closed for several years finally reopened. The chances for the plant to succeed are much greater now that corn prices are at their lowest in five years, Purdue University agricultural economics professor Christopher A. Hurt told The Times of Northwest Indiana. “I think the prospects appear to be quite favorable for that plant if they can get it up and running as quickly as possible,” he said. And that doesn’t take into account the possibilities for export to countries that are dependent on imported oil.
The ethanol effort is often criticized as one that wouldn’t even exist were it not for government support that has boosted it all the way. The entire farm bloc are now supporters of ethanol. However, to everyone’s surprise, when the subsidies ended, ethanol production kept increasing!
Now that ethanol has found a market abroad, it is possible that even amidst falling oil prices, the industry will be able to even keep growing. Ethanol still has a high octane level and substitutes for much more noxious chemicals by blending with gasoline. Its role as at least a 10 percent additive seems secure. Now let’s find out if ethanol can find a place in the world market as well.
Will falling gas prices hurt alternative vehicles?
Everyone is saying that falling gas prices will ruin the market for alternative fuels and vehicles. But it isn’t time to give up on them now.
Ethanol and methanol are still two liquid fuels that will easily substitute for gasoline in our current infrastructure. Ethanol is making headway, particularly in the Midwest, where it is still cheaper than gasoline and has a lot of support in the farm economy. The big decision will come when the EPA finally sets the quota for ethanol consumption for 2015 – if the agency ever gets around to making a decision. (The decision has been postponed since last spring.) A high number should guarantee the sale of ethanol no matter what the price of gasoline.
That leaves methanol, the fuel that has the most potential to replace gasoline and would it fit right into our present infrastructure but must still run the gamut of EPA approval and would require a change in habits among motorists. Methanol is still relatively unknown among car owners and is hindered by people’s reluctance to try new things. But the six methanol plants that the Chinese are building in the Texas and Louisiana region could break the ice on methanol. The Chinese have 100,000 methanol cars on the road now and are shooting for 500,000 by 2015. Some of that methanol might end up in American engines as well.
Another alternative that is still in play is the electric car. In theory, electric cars should not be affected much by gas prices because that is an entirely different infrastructure. The appeal is not based on price so such as the idea of freeing yourself from the oil companies completely and relying on a source of energy.
The Nissan Leaf has not been badly hit by oil prices. Tesla’s cars, of course, have not gone mass market yet, but the company is relying on a new breed of consumer who does not worry too much about the price and will appreciate the car for its style and performance. Elon Musk has shown no indication of backing down on his great Gigafactory, and Tesla is still aiming to have the Model III (its third-generation vehicle, which will come at a much lower expected price point of $35,000) ready by 2017.
This leaves natural-gas-powered vehicles as the only group that might be hurt by falling gas prices, and here the news is not too good. Sales of vehicles that have compressed natural gas as their fuel declined 7.2 percent in November. As David Whiston, an analyst at Morningstar, told the Houston Chronicle’s Ryan Holeywell: “I hear all the time from dealers: As soon as gas starts to go down, people look at light trucks.”
CNG’s appeal has always been that it will be cheaper than regular gasoline, so plunging gas prices make it lose much of its appeal. It costs $5,000 to install a tank for CNG fuel, and that is not likely to attract a lot of takers with oil prices low. For a gas-electric hybrid, there is similar math. For the Toyota Corolla, the electric portion adds another $7,000 to the price. That’s why the CNG-based solutions never caught up with the light-duty vehicle. They are still attractive for high-mileage vehicles like buses and garbage trucks. “For the consumers doing the math, if gas goes below $3 per gallon, the payback period goes out a number of years,” Whiston told Holeywell. “And the break-even point makes sense for fewer people.”
The collapse in gas prices is not the end of the road for alternative fuels. In a couple of months, the price may be up again, and all those people who have rushed out to buy light trucks will be stuck with them. The changeover to alternative fuels is a slow process, fraught with false starts and misleading signals. But in the end, it will be well worth it to reduce our dependence on imported oil and achieve some kind of energy independence. Car buyers have very short memories and an inability to look very far into the future. Remember, it’s always a passing parade. Consequently, their reaction has been only short-term. But once people buy those trucks, they’re stuck with them for the next 5 to 10 years. If the price of gas goes up again, they may live to regret it.
