2015 was a good year for the ethanol industry for both production and blending. According to the Energy Information Administration (EIA), U.S. ethanol producers increased their production 3.4 percent to 14.81 billion gallons in 2015, and refiners and blenders consumed 13.69 billion gallons (2.7 percent more), adding it to the U.S. gasoline supply.[i] (See Table below.) That consumption amounted to roughly 893,000 barrels of ethanol per day.
Ethanol production has been aided by the Renewable Fuel Standard that requires a specified level of renewable fuels to be produced and blended into gasoline. The legislated volumes were recently changed by the Environmental Protection Agency because of the closeness that ethanol has come to the 10-percent blend wall—the amount of ethanol to motor fuel consumption. Note that if all the ethanol produced in 2015 was blended into gasoline, ethanol’s 10.5 percent share would exceed the 10-percent blend wall. The blend wall is important because most automobile manufacturers will not warranty vehicles consuming more than 10-percent ethanol. Further, smaller engines in boats and lawn mowers are already having problems with a 10 percent ethanol level, requiring additives to deal with the corrosive properties of ethanol.
Ethanol, however, is about a third less efficient than gasoline, and, as a result, it is a more expensive fuel for consumers of motor fuels. Furthermore, about 40 percent of America’s corn crop goes to ethanol production. In 2012, the amount of corn used to produce ethanol in the United States exceeded the entire corn consumption of the continent of Africa and in any single country except China.[ii]
The original argument of proponents of the Renewable Fuel Standard was that it would make the United States less dependent on oil imports. But, ethanol has done little to reduce oil imports. Since 2008, net oil imports have declined by 58 percent (6.4 million barrels per day), while domestic oil production has increased by 88 percent (4.4 million barrels per day). Ethanol production, however, has only increased by 360,000 barrels per day. The dramatic increase in domestic oil production is primarily due to shale oil produced by using hydraulic fracturing and horizontal drilling technology. The increase in U.S. oil production is about five times the output of all the ethanol distilleries in the country.
EPA Sets Ethanol Levels
Congress provided in its Energy Independence and Security Act that governs the RFS that each November, the EPA is supposed to provide final ethanol levels for the following year. The EPA has been routinely producing these levels behind schedule, providing final ethanol blending levels for 2014 and 2015 in November of 2015. Last November, however, it also lowered the ethanol requirement in 2016 to 18.11 billion gallons of renewable fuel to be blended with gasoline, an amount over 4 billion gallons short of the original target of 22.25 gallons[iii], of which 15 billion gallons can be corn-based according to the original legislation. Of the 18.11 billion gallons EPA set for 2016, 14.5 billion gallons can be corn-based.[iv] If gasoline consumption remains at 2015 levels in 2016, the ethanol component of motor gasoline will be 10.3 percent, exceeding the blend wall. The American Petroleum Institute has requested that EPA set the final ethanol mandate at no more than 9.7 percent of gasoline demand to help avoid the 10 percent ethanol blend wall while meeting consumer demand for ethanol-free gasoline for engines that cannot use an ethanol blend. [v]
Congress believed that it was providing a means of reducing our dependence on foreign oil when it mandated higher RFS levels in the 2007 EISA. Clearly, Congress was wrong. Net oil imports have been reduced to 24 percent of consumption from 60 percent in 2005. Because of the shale oil renaissance, the United States is producing oil at levels last seen in the early 1970s and storage is at record capacity. Ethanol is more expensive on an energy-adjusted basis than gasoline, but the RFS mandates ethanol anyway. Even if the RFS were abolished, U.S. refineries would still use ethanol because it serves as an oxygenate and octane booster in gasoline. The major difference would be that the blend wall would no longer be a problem and that consumers with small engines would be more readily able to find ethanol-free gasoline.
[i] KTIC, Numbers Released Today Confirm Record U.S. Ethanol Production and Use. February 29, 2016, http://kticradio.com/agricultural/numbers-released-today-confirm-record-u-s-ethanol-production-and-use/
[ii] CNS News, America May Be Catching On to Ethanol Racket, February 4, 2016, http://www.cnsnews.com/commentary/nicolas-loris/finally-america-may-be-catching-ethanol-racket
[iii] Hot Air, Super Tuesday “Boater Voters” and the Renewable Fuel Standard, February 20, 2016, http://hotair.com/archives/2016/02/20/super-tuesday-boater-voters-and-the-renewable-fuel-standard/
[iv] IER, December 11, 2015, http://instituteforenergyresearch.org/analysis/epa-sets-final-ethanol-levels/
[v] Farm Futures, EPA rulemaking for RFS under fire, February 17, 2016, http://farmfutures.com/story-epa-rulemaking-rfs-under-fire-17-137605