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‘Blend wall’ could mean oil industry ethanol costs will be passed on to consumers

  • The Wichita Eagle
  • Published Wednesday, Sep. 4, 2013, at 6 p.m.

More information

Production of barrels of oil and ethanol for 2011 (most recent year)

Crude oilEthanol
Kansas41,503,00010,676,000
U.S.2,062,932,000331,646,000

Source: U.S. Energy Information Agency

The price of corn is down. That’s about where the good news ends for ethanol makers in 2013.

The trends that have punished the industry for the past few years appear to be getting worse.

The industry is now basically providing all of the ethanol needed to satisfy the government’s mandated limit – and the marketplace’s demand – for blended fuel, which is usually 10 percent ethanol.

The industry has hit what’s known as the “blend wall.”

One result is that smaller, higher-cost producers are being forced out. For instance, the Abengoa ethanol plant in Colwich shut down in 2011 after about 25 years in operation.

Hitting the blend wall is causing a host of complications for the ethanol industry, the Environmental Protection Agency, Congress, the petroleum industry and, maybe, the driving public.

Dave Vander Griend, president of ICM, a Colwich-based designer and operator of ethanol plants, said he feels the industry has been slapped into a straitjacket it can’t escape on its own and that political and industry forces aren’t likely to help.

The ethanol industry won’t die, he said. But it is being sentenced to stagnation – unfairly, in his opinion – and eventual takeover by the big oil companies, which are required to put ethanol into their gasoline.

“Ethanol at E10 (10 percent of a gallon of fuel) will not go away,” he said. “The government established it, and the petroleum industry likes it.”

Mandate mess

Ethanol, pure grain alcohol, was first adopted as a replacement for a gasoline additive called MBTE to boost octane. MBTE, which is considered as having the potential to cause cancer, started being phased out in 2000.

Then, in 2005, Congress created the mandate called the Renewable Fuel Standard, which it expanded in 2007. The RFS required refiners/blenders of gasoline to buy slightly more ethanol every year until they bought 36 billion gallons by 2022. In 2012, they bought just shy of 13 billion gallons. The idea was to build up a domestic automobile fuel industry, reduce dependence on foreign oil and help American farmers.

Congress broke the RFS into several categories. Most biofuel is made from corn, but the RFS also envisioned the rapid growth of ethanol made from the cellulose-heavy parts of plants, such as wheat straw or switchgrass, rather than corn kernels. That was supposed to become a major part of the ethanol market as time went on, but such technology is just becoming commercially viable.

But there is also a second key federal rule.

The EPA had rules to limit how much ethanol may be added to fuel. The worry was that ethanol would damage automobile engines, which are designed to burn gasoline. As part of the law, the federal government included tax incentives to develop the industry. Because ethanol is cheaper than gasoline by volume – although more expensive for the amount of energy it delivers, according to the EPA – the makers of gasoline were happy to mix in the ethanol.

From 2005 to 2011, the ethanol industry saw double-digit annual growth. Farmers responded by growing more corn, arousing the ire of some environmental groups who said that producing ethanol is actually more harmful to the environment than producing gasoline. The growth of the ethanol industry helped push corn prices higher, which also boosted the price of other grains and substantially raised the income of crop farmers. But it also raised costs for every industry that relies on corn, from raising cattle and chickens to making soda pop.

Having both the RFS and the E10 limit set up a potential conflict. At some point, petroleum companies might have to buy more ethanol than they needed for the gasoline they made.

Conflicting goals

That point was reached this year.

The American driving public’s gasoline consumption has actually been falling slightly since at least 2011 because of the weak economy and increased fuel efficiency in cars. That decline is expected to continue at least through 2014.

Because ethanol production is tied directly to the amount of gasoline sold, production has also stagnated.

The EPA last year approved moving to E15, a potentially 50 percent boost in production for the ethanol industry.

The petroleum industry can, but doesn’t have to, sell E15 – and it largely hasn’t. Instead, the petroleum industry has fought E15 hard with lobbying and public relations campaigns.

Bitter ethanol proponents say that moving to E15 would mean that the oil industry would essentially surrender 5 percent of its market share in a time of stagnant growth for the industry.

But Carlton Carroll, a spokesman for the American Petroleum Institute, which represents the petroleum industry, denied the industry opposes E15 for market reasons. He said the industry is worried that E15 damages automobile engines.

“We’re in the business of selling fuel to our customers, and we don’t want to sell fuel that will damage their cars,” he said.

Jason Searl, executive vice president for Poet Ethanol Products, which markets ethanol all over the country, said that petroleum companies and engine and automobile industries could have seen the issue brewing for years – because the RFS has the schedule for ever-increasing ethanol use built in.

“None of this is news,” Searl said. “But rather than investing in the higher levels of infrastructure to market the ethanol, there has been a really amplified effort to repeal that law rather than comply with it.”

In August, the EPA officially ratcheted down the RFS requirement for 2013 and telegraphed that it would do the same for 2014. The agency cited stagnant gasoline demand and the much-lower-than-originally-expected production of cellulosic ethanol.

Consequences

But the RFS hasn’t gone away, either, and it has spawned other problems.

Many observers say that the cost of gasoline will have to go up as petroleum companies buy either ethanol they can’t use or things called Renewable Identification Numbers, which are issued by the EPA for every gallon of ethanol. There is a separate market for trading RINs by the petroleum companies, and the value of RINs skyrocketed earlier this year as the prospect for overproduction became real.

Oil companies have said the cost of this excess ethanol, which they are required to purchase, will have to be passed on to the driving public.

Vander Griend counters that this decision is a choice made by the petroleum industry. It can stockpile the RINs and make the public pay for them – or it can move to E15 and blend ethanol in at a lower price to both the oil industry and the public. The wholesale cost of ethanol is $1 less than a gallon of gas on a volume basis, Searl said.

If ethanol makers could sell directly to the public, their future would be assured, Vander Griend said. But that would involve federal action to encourage the hugely expensive conversion of hundreds of thousands of new gasoline pumps and millions of cars. Automakers are now getting $50 per car to make flex fuel vehicles, but that program ends in 2016.

Vander Griend sounded gloomy. Federal action to further support the industry doesn’t seem likely at this point.

“Politics short-circuits a lot of things,” he said. “If this industry stagnates, I’m afraid we’ll go back to a total dependence on fossil fuels.”

Reach Dan Voorhis at 316-268-6577 or dvoorhis@wichitaeagle.com. Follow him on Twitter: @danvoorhis.

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