Refiners, Ethanol, and You. Time to Worry?

Approximately 40% of all corn grown in the United States goes to ethanol production. Photo: Wikimedia Commons.

To blend or not to blend? That is the question refiners will need to answer in 2014 as they cope with falling gasoline demand and strict ethanol blending mandates set by the EPA. The Renewable Fuel Standard has been in place since mid-2005, although for the most part, consumers haven't noticed one way or the other. That could change in a big way if refiners' predictions prove correct.

I recently spoke with Charles Drevna, president of the American Fuel and Petrochemical Manufacturers, to discover how ethanol blending will affect refiners, consumers, and the economy in 2014 and beyond if ethanol mandates aren't adjusted downward. Here's what I learned.

Tug-of-war
Before speaking with Drevna, I figured that a lot of the arguments stemming from the refining industry were just attempts to protect its own agenda. That obviously plays a part for all sides involved in the issue, but it now appears to me that refiners are largely caught in the middle. Refiners serve a relatively simple purpose: They create finished petroleum products from crude oil and distribute it to the market, be it independent gas station owners or third-party distributors. That simplicity is getting much more complicated with soaring ethanol blend rates.

Source: Energy Information Administration.

The nation is precariously close to the Blend Wall, or the line the auto industry has drawn in the sand for ethanol blending ratios. It is currently defined as 90% gasoline and 10% ethanol, or E10. It is also at the heart of the battle between the EPA and the ethanol industry and the refining, automobile, and food industries. The EPA thinks E15 can solve the problem, and it could, but only if the nation's auto industry and infrastructure agree.

Refiners are hit particularly hard because they're required to purchase renewable identification numbers, or RINs. The University of Missouri succinctly summarized the issue in a December 2012 study titled "A Question Worth Billions: Why Isn't the Conventional RIN Price Higher?" (Link opens a PDF.)

(RINs) are certificates fuel blenders use to prove mandate compliance. Fuel blenders can buy or sell RINs. The conventional RIN price indicates how difficult it is for fuel blenders to meet the overall mandate. ... Pushing more ethanol through the system would be increasingly difficult for fuel blenders, meaning conventional RIN prices could rise.

In a case of academic foreshadowing, the report was published right before RIN prices jumped from a few pennies per gallon to nearly $1.50 per gallon this summer. Those costs are inevitably passed on to you, the consumer, but things could get much worse. The amount of ethanol required to be blended into gasoline is directly determined by how much fuel a refiner or blender sells to the market. If the supply of RINs continues to tighten up, top refiners such as Valero and Phillips 66 could simply produce less gasoline to reduce their obligations and costs -- a realistic business decision. That, of course, would tighten the nation's gasoline supply and send gasoline prices much higher.

How are refiners caught in the middle? They can't sell ethanol blends to independent gas station owners if they (and their customers) don't want the product, which limits hopes that E15 and E85 can solve the problem. Exporting isn't always an option, either, as many nations refuse to purchase E10 gasoline outright or impose tariffs on imports to spur domestic biofuel programs. Furthermore, refiners would be in a tough spot for selling blends greater than E10 if it causes millions of Americans to void the warranties on their cars -- the biggest question mark heading into 2014.

Well, this is awkward ...
The auto industry has yet to take a unified stance on E15, but all companies do agree that more extensive testing needs to be performed on engines. Toyota (NYSE: TM  ) isn't taking any chances. It began putting stickers on the gas caps of its various car models in 2012 that simply state "Up to E10 gasoline only." That was seemingly a shot at E15. Ford (NYSE: F  ) , General Motors, and Chrysler have yet to place visual warnings on their cars, although each has chosen words carefully when it comes to E15. Cynthia Williams, Ford's environmental policy manager, was quoted as saying "Ford does not support the use of E15 in legacy vehicles," instead advising drivers to consult their owner's manual.

A warning to drivers about using E15. Source: Boise Guardian.

Does that mean the Blend Wall is a firm ceiling? While it's entirely possible that more testing could prove E15 is safe in vehicles produced after 2001 (as the EPA has certified), smaller engines such as off-road vehicles, lawnmowers, motorcycles, and boats are not. It looks as if the fuel market may get much more complicated for consumers.

This could get ugly
The EPA did extend an olive branch of sorts this summer, axing cellulosic ethanol requirements for 2014 because of supply constraints. The problem is summed up by KiOR (NASDAQ: KIOR  )  , which owns 11 million of the nation's 19 million gallons of cellulosic ethanol capacity that will generate RINs in 2013. It has run into problems hitting internal production targets since its first commercial facility came online. Management admitted that operations could be jeopardized if the company can't find adequate funding in the next several quarters while the kinks are worked out of its catalytic process.

Other leaders, such as POET and DSM, are looking to make a big splash in cellulosic ethanol in 2014, but the industry has had an embarrassing start out of the gate. Besides, while cellulosic ethanol would provide some relief to the RIN market (corn ethanol and cellulosic ethanol carry their own RINs, but both can be blended to meet obligations), it wouldn't alleviate fears of exceeding the Blend Wall.

Are consumers doomed? It seems that it's a real possibility beginning next year, but this is a complicated issue. Be sure to check back in the coming weeks as I dive into the topic in more detail.

Putting more ethanol into gasoline could, theoretically, void the warranties on millions of Americans' cars. Will future testing force Ford to loosen its stance on E15? Perhaps, but no automakers are willing to pay the bill for such testing. Besides, Ford has all eyes on growth initiatives and European operations at the moment. Do you know the major developments that could crush Ford? The secrets to success that could make investors like you rich? The answers are simpler than you think, and The Motley Fool is sharing them in a free report titled "5 Secrets to Ford's Future." Inside we outline critical information every Ford investor must know, so click here now for your free report.


Read/Post Comments (16) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2013, at 12:32 PM, BloviationNation wrote:

    RIN's, E10, E15, EPA, Ethanol Industry, Petroleum Industry, Gov't mandates, etc..... Is it any wonder I'm looking forward to my new Tesla.

  • Report this Comment On August 24, 2013, at 12:52 PM, lifeisawesome wrote:

    Ethanol is a scam.

    --Does not cut back on oil usage (lowers fuel economy)

    --does not cut down on all pollution

    --increases the price of food,

    --decreases the amount of food grown for actually eating

    --enriches those growing the corn

    --ruins many fuel injection systems.

    Please get corn out of our cars!!

  • Report this Comment On August 24, 2013, at 1:31 PM, Oilvet wrote:

    My god the next thing these idiots in the EPA will require is that corn be used in food products!

  • Report this Comment On August 24, 2013, at 1:54 PM, Bullshipper16 wrote:

    As a former petroleum sales and delivery person to the Ag area, I delivered the second load of a 10%blend of ethanol in my area in the seventy's. We went thru lots of on the spot findings as to what we discovered. Like not switching someones above ground storage in the Mid-West in January. Why? Well all fuel tanks above ground get frost on them in cold weather. You can see the fuel level in a tank by where the frost line is. What most folks don't realize is that above that line the frost is on the inside of the tank. When the sun warms up the metal the frost on the inside turns to water and falls to the bottom of the storage tank. In cold weather it will freeze and when you mix in ethanol, the ethanol melts the water and absorbs it. Water is heavier than fuel and will always settle to the bottom and will be the first thing pumped out. Ethanol will absorb ten times it's own weight in water. A car can not run on water even with ethanol mixed with it.

    I would also question this statement from the above comments. "--increases the price of food," Well maybe not so much. Recently in a Bloomington, Il newspaper there was a article about the cost added to the price of corn per bushel. A bushel of corn weighs 56 lbs The September 1,2013 price for new corn is around $4.96 per bushel. According to the newspaper, if corn ethanol were to stop being produce, it would drop the price of corn only 6 cents per bushel or less than a penny a pound!

    The next comment of "--decreases the amount of food grown for actually eating". is totally false. The reason farmers were active to get corn to be a part of, but not limited to, the ethanol fuel program, was because of a 40% SURPLUS of corn on the market. I find it hard to believe that it has limited any kind of food supply's.

    Last I must ask this, lets look at Brazil. They have been running on totally ethanol since the seventy's. Now do their mechanics know how to make their vehicles run on it and we don't? Is there a secret vehicle manufacture that makes identical GM, Ford, Chrysler and other vehicles that we do not know about? Oh and how about lawn mowers and motorcycles and boats also.

    I believe when all facts are looked at, you will find that the big oil company's are putting out most of this false advertizing about ethanol. My question since the mid seventy's has always been why we made it 10% to begin with. The best answer has always come back that that was all the government and Big Oil would allow.

  • Report this Comment On August 24, 2013, at 2:03 PM, schutt678 wrote:

    lifeisawesome, you think ethanol enriches farmers you better get your butt to an actual farm and find out the truth. I'm guessing you have never been or worked on one in your life. Unlike other businesses we don't set the price we get we take what the market is. I'm also guessing that you have no idea what price we are getting for corn and what the cost is to produce corn. Its also funny that everyone blames the food price on this, when the reality is corn has dropped over $2/bushel since last fall because the government is telling everyone our corn supply is high and we are going to have a great crop this year (they don't walk out in fields to see what is actually there) so because supply is so high the price keeps dropping yet food prices remain high so is it really ethanol doing that? Also I have had flex fuel vehicles and have used nothing but either e10 or e85 for years and I have never had any problems with my fuel injection system. Maybe you find out the truth before you post things.

  • Report this Comment On August 24, 2013, at 2:16 PM, Schneidku40 wrote:

    lifeisawesome,

    Although the price of corn has plummeted this year, you forgot one- the increased corn production is causing severe mining of groundwater resources. All over the midwest, farmers are planting and irrigating corn in places it could never survive without irrigation. Aquifers are being depleted, and the major western Kansas/Nebraska/etc. aquifer, the Ogallala, has been drawn down by over 50 feet in some places over the last 20-50 years (in some areas that equals over 50% of the original aquifer thickness). The water may completely dry up in places within a decade or two.

    There is at least one ethanol production plant in Kansas that uses milo (sorghum) instead of corn. Milo generally needs less water than corn. If more plants went that direction, at least that would be one way to help it.

  • Report this Comment On August 24, 2013, at 3:55 PM, DuterRakan wrote:

    Looking for an alternate renewable fuel source? Forget ethanol .. switch all vehicle engines to Diesel engines and run them on what it was originally designed to run on .. Hemp oil ...

  • Report this Comment On August 24, 2013, at 4:04 PM, marinemechanic1 wrote:

    i work in the marine industry and i see the effects of ethanol everyday. the ethanol eats the insides out of the rubber fuel lines, even the new epa rated ones. all of those little bits of rubber plug up the filters in the injectors, causing the engine to break down. the ethanol fuel does not react well to long term storage. ethanol tends to separate out of the gasoline, causing the octane number to drop below what an engine can run on. etthanol is hydroscopic, meaning that it readily absorbs moisture. engines do not run on water. most of these problems are a non issue for autos. most people drive their cars daily and always have fresh fuel in the tank. the biggest problem with cars is the decreased fuel economy that ethanol blended fuels provide. i live in an area where non ethanol fuel is still available. recently, i went on vacation and did a fuel mileage test between ethanol free fuel and e10. i noted about an 11% decrease in fuel economy with e10 gasoline. all of my driving was on the interstate at similiar speeds and terrain. how does a decrease in fuel economy save fuel? how much energy does it take to make a gallon of ethanol? no one ever brings up the fact that the ethanol is an energy inefficient product, requiring more energy to make it than it produces when it burns. someone has sold us a bill of goods with this ethanol fuel and they are getting wealthy from it. not one of the politicans really cares about the enviroment, all they care about is getting reelected and stuffing their pockets with special interest money.

  • Report this Comment On August 24, 2013, at 4:17 PM, cynicalskeptic wrote:

    Sorghum ? Gad ! Looks like I may have to put maple syrup on my (wheat) pancakes---

  • Report this Comment On August 24, 2013, at 4:58 PM, btc909 wrote:

    2001 and newer for E15 yet some 2014 manuals state if you are running E15 and have an engine fault due to excessive Ethanol it will void your warranty.

  • Report this Comment On August 24, 2013, at 5:06 PM, marinevet wrote:

    Ethanol is not the answer. Unless you are looking for higher food prices. Or a shortage in a bad year. A Lower quantity of corn for food sources and corn products. (corn syrup, HI fructose sweetener that is in everything. Etc.)The price will go up and there won't be enough corn for farmers to export after they feed us. It is better for the farmers to grow corn to sell for grain. (FOOD). The government needs to butt the hell out.

    There are much better plants out there. Corn means an high maintenance, hi water use product that drains the water aquifer's and needs lots of nutrients.

    Hemp comes to mind for biodiesel. Low maintenance high volume crop. 2 crops per year.No psychoactive chemicals.

  • Report this Comment On August 24, 2013, at 5:31 PM, crash3085 wrote:

    I always thought the number after the "E" really meant the percentage of decrease in your fuel mileage! OK, not really, but it does seem to match up fairly closely.

  • Report this Comment On August 24, 2013, at 6:05 PM, n4jmxx wrote:

    Ethanol is not good for engines. It sucks moisture out of the air and clogs up carburetors on small engines and fuel injectors. Just give me the gas without the corn. And tell me why we are not moving away from fossil fuels. I mean besides all the money certain people make. Like our representatives in Washington that receive money from the corn lobby.

  • Report this Comment On August 24, 2013, at 9:08 PM, laland wrote:

    Ethanol makes sense if it can lower the operating costs of a vehicle. Yes, popular in Brazil, but the lowest temps in Brazil are above freezing (32F). Brazil vehicles can run on any combination of gasoline-ethanol. In US terms that means E00 to E100. The fuel line are stainless steel and the timing module compensates based on the mixture content. It is relatively easy to design and test for. Adds a couple of hundred dollars to the price of a new vehicle. There are also cars that run on methanol. Again, relatively easy to make cars run on ethanol/methanol/gasoline mixtures.

    And methanol can be produced from natural gas cheaply, of which the US has an abundance at the moment.

    Until cellulose ethanol can compete with Brazilian ethanol (currently the cheapest) on price, I don't see ethanol lowering the price of transportation.

  • Report this Comment On August 25, 2013, at 12:15 AM, rwj146 wrote:

    I am not sophisticated enough t run all the numbers some you have but real world last weekend I got 51MPG with my smart car,driving from Ft Worth to OKC 230 miles using 10% ethanol,Filled with pure gas to go home , same route and got 53mpg. Not a scientific but real world test

    Does the trade-off in mpg set of cost of pure fueL

  • Report this Comment On August 27, 2013, at 3:08 PM, JoanneIvancic wrote:

    See comments to EPA Tier 3 proposed regulations that introduce the idea of E30 capable engines that will evolve to E30 optimized engines. Many of these ideas came from discussions with automotive engineers, including those at Ford and GM as realistic ways to achieve new CAFE standards of 54.5 mpg with least costly high octane fuel. http://advancedbiofuelsusa.info/in-epa-tier-3-comments-advan... We will have to evolve the distribution system just as we did to move from leaded gasoline to unleaded; but it will be worth it, just as it was worth it to make (unleaded) fuel available so that we could use catalytic converters for air pollution control.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2608486, ~/Articles/ArticleHandler.aspx, 10/21/2014 12:53:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement