A study that concluded US autos can run just fine on a 20% ethanol blend, released Tuesday, makes one immediately turn to the market to see if financial incentives exist for blending 20% ethanol into a finished gasoline mix.
The Environmental Protection Agency on October 7 joined the Department of Energy and the Department of Agriculture in releasing the preliminary report, which showed that when E20 was injected into 13 popular late-model vehicles that were not designed to run on more than 10% ethanol, tailpipe emissions were similar to E10 levels. Concerns remain among auto makers about whether a 20% blend would damage engines; that is a separate issue from the tailpipe emissions.
Here's where the market stands, and the questions that would be key in whether blenders would actually produce a 20% ethanol-blended gasoline mix, even if all technical doubts were resolved.
There are several relationships that would come into play:
--What is the "crush spread"? In other words, what are the profits to turn corn into ethanol versus selling it into its traditional agricultural markets? This is a key question, because if the spread is weak -- as it is now-- it's doubtful that ethanol supply will be available for a move to 20% ethanol blends, as ethanol plants shut or new ones never open.
--What is the spread between ethanol and gasoline? Does it make financial sense to displace gasoline by blending more ethanol, beyond the 10% now found in reformulated gasoline and many blends of conventional gasoline? On Tuesday, Platts assessed Gulf Coast conventional gasoline at approximately $2.05/gal, and ethanol at $1.89 per gallon. Deduct another 5.4 cts from that ethanol number for the blending credit, and you've got less than a $1.83 value for ethanol. That's about a 22 ct differential with gasoline. But that's from a base price of $2.05 for gasoline, and ethanol's energy efficiency is anywhere from 10% to 25% less than gasoline, depending on who is doing the arguing. So ethanol is about 11% less than gasoline but with a reduced energy efficiency probably in excess of that. So do you blend more ethanol than 10% at that sort of differential if you can? It would be a close call.
--Here's a question I can't possibly answer: at what point does the reduced energy efficiency of blending ethanol into gasoline get noticed by the average driver? I doubt it's at the 10% level. It would need to be a lot more than that.
--But what is going to happen to the gasoline/ethanol spread if ethanol plants start closing, squeezed by higher corn and lower ethanol prices? An initial move to 20% by some blenders could result in more ethanol demand, making the crush spread more attractive to ethanol producers. But if the ethanol/gasoline spread narrows, maybe the economics of going to 20% no longer work. And what about the higher octane value you get from the additional 10 percentage points of ethanol; how does that play into the economic equation?
--And then, of course, if the blends move toward the 20% level, what happens to gasoline refining margins? We know what happens: they fall. What does that do to gasoline production? You can't just cut it all out, because refineries are not set up that way, and also because reformers need to be run to generate the hydrogen needed in the desulfurization units for making diesel. As one trader told Platts: gasoline is just a by-product now. Just one more factor going forward.
Ah, markets. They're truly amazing things. Somehow, they usually figure themselves out.
If it works in vehicles, then it makes sense to move to 20% ethanol. At the same time, the duty on Brazilian Ethanol should be removed, afterall, there is no duty on Foreign Oil.
This will also prompt many people to buy autos with E85 capability. Time to move beyond Oil. In fact, a Brazilian company is also selling a kit that will make the regular car run on E85.
It won't work at all if it wrecks car engines. If the life of an engine is decreased by 1% that's 1000 miles in ten yr life cycle. In resale terms that could be $500 -$1000 in the resale price of the car. Once consumers find out about this, it will be hard to sell new cars or consumers will be tempted to 'reformulate' their own gasoline.