Source: The Cattle Network
Fuel ethanol is a renewable fuel made from grain or other biomass sources that is blended into motor gasoline. Ethanol blending into gasoline in the United States has been rising strongly since 2002, initially driven by action taken in several States to ban the use of methyl tertiary butyl ether (MTBE), a competing gasoline additive. At the Federal level, the Energy Policy Act of 2005 (EPACT2005) made changes in the requirements for reformulated gasoline that precipitated a Nation-wide phase out of MTBE beginning in 2006. Soon thereafter, the Energy Independence and Security Act of 2007 (EISA) further boosted fuel ethanol demand by accelerating and extending the federal Renewable Fuel Standard (RFS) program that was first established by EPACT2005. The revised RFS requires the use of about 15.2 billion gallons of renewable fuel by 2012 and 36 billion gallons by 2022. EIA expects that 13.2 billion gallons of the 2012 requirement will be met using corn-based fuel ethanol.
Under current Federal regulations, ethanol blends of up to 10 percent (E10) may be sold for use in all gasoline-powered vehicles. E85, a fuel blend with 70 percent to 85 percent ethanol content, may also be sold, but only for use in vehicles that have been specifically designed to accommodate E85. To date, however, E85 is presently consumed in very limited volumes (5,644 barrels per day (bbl/d) in 2008) with only about 1,900 E85 pumps nationwide in 2009, and it is not expected to show significant growth over the short term.
In an environment where nearly all fuel ethanol is sold as E10, saturation of the E10 market creates a barrier to accommodating additional ethanol supply, commonly referred to as the “blend wall”. During April 2010 an estimated 834,000 bbl/d (12.8 billion gallons per year [BGY]) of fuel ethanol was blended into gasoline, representing an average 9.2 percent of total gasoline product supplied by volume. The July EIA Short-Term Energy Outlook projects that the ethanol share of the gasoline pool could reach 10 percent in the first quarter next year when total gasoline consumption is expected to average about 8.8 million bbl/d (135 BGY).
There are 4 primary factors that will influence the ethanol blend wall constraint:
- E10 sales volume
- E85 sales volume
- Ethanol-blending infrastructure constraints that limit the ability to blend and deliver E10 and E85 to local markets
- Possible relaxation of the 10 percent ethanol blending limit on fuels used in vehicles not specifically designed to accommodate E85.
Absent a relaxation of the 10 percent limit on ethanol blending in the general gasoline pool, and with still increasing ethanol production capacity, there will likely be downward pressure on ethanol prices as the blend wall is approached, which could contribute to an increase in E85 sales within the constraints of its limited infrastructure, an increase in ethanol exports, and lower capacity utilization rates. Over the past year, and especially at the start of 2010, the ethanol price (after deducting the 45 cents per gallon ethanol blender’s excise tax credit) has remained at a discount to reformulated gasoline blendstock for oxygenate blending (RBOB) (Figure 1).
