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Thursday, April 17, 2014

Ethanol: Bleak Presence, Brighter Future


Ethanol has seemed to have a run of bad luck lately.  First, it hit the blend wall, the maximum of 10% of the total motor fuel supply.  Then the recession curtailed some of the miles we drove and less gasoline was purchased.  Then the EPA proposes that the Renewable Fuels Standard (RFS) be revised to curtail ethanol production.  Then the government increases the fuel economy target for auto makers to ensure we continue on a downward trend of less gasoline being purchased.  Never mind the woes of the petroleum industry, all of those dynamics combine to limit the growth of ethanol.  It seems to have a bleak future, or does it?


It may not be common knowledge but in recent weeks, the price of ethanol in metropolitan markets such as New York, Chicago, and Los Angeles has been in the $4 neighborhood.  That is $4 per gallon, and is well above the price of unleaded gasoline.  This is contrary to conventional wisdom that ethanol is cheaper than gasoline and helps reduce the price of motor fuel for the motoring public. 


Sorry, but the rail freight logjam issues have provided insufficient service to ethanol refineries, and ethanol deliveries to fuel blenders are few and far between.  That pushes up the basis at the blending plants and pushes down the basis at the refineries.  Recently there has been a $1.50 to $2 difference between the two because of the railroad problems.


That problem will be temporary, believe industry analysts and Iowa State University economist Bob Wisner.   He says, “Whether ethanol prices will weaken relative to gasoline in the next few years will depend heavily on whether the domestic market can be expanded beyond the current blend-wall saturation level.”  Wisner says before the RFS policy was put in place, there was a surplus of corn, but afterwards, corn became a limiting factor in the ethanol supply chain.  He says that caused the price of corn to rise until ethanol producers reached their break-even level, and then the refiners stopped their expansion plans. 


Looking at the future, Wisner says, “If ethanol demand does not expand in the future, rising corn yields will likely shift corn back to a chronic surplus supply with relatively low prices, except in years of adverse weather.   Instead of ethanol driving corn prices, the reverse may be true with ethanol prices being heavily influenced by corn’s impact on ethanol production costs.”  But he says ethanol may have several aces up its sleeve which would expand the demand for ethanol.

1)      E-15.  Acceptance of E15 in the motor fuel industry has been very slow. Retail fuel marketers offer a number of reasons for their reluctance to market this fuel, but over time its use may increase.

2)      E85 is another alternative.  It can be used only in flex-fuel vehicles and its market has been limited by (1) the small number of retail fuel stations selling it, (2) a limited but increasing percentage of the vehicle fleet that is made up of flex-fuel vehicles, and (3) lack of competitiveness of E85 with gasoline and E10 because of its much lower fuel mileage per gallon.

3)      Increased foreign use and competitive U.S ethanol prices from lower-cost corn could lead to expanded export demand for ethanol.


The price of ethanol is currently higher than gasoline, which is quite abnormal, and should soon return to a lower price level.  Consumption of ethanol may tend to decrease because of the blend wall and increased auto mileage economy.  However, increased use could be spurred by higher blends of ethanol along with lower  production costs, as well and with increased international use and higher exports.

Posted by Stu Ellis on 04/17 at 10:27 PM | Permalink

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