California's ethanol

May 26, 2003
In a showdown looming in Congress over gasoline chemistry, a new report by the Energy Information Administration on California's experience will be helpful.

In a showdown looming in Congress over gasoline chemistry, a new report by the Energy Information Administration on California's experience will be helpful. The state's refiners are switching to ethanol as the main source of oxygen in gasoline formulated to combat smog and toxic emissions. They have to replace the former oxygenate, methyl tertiary butyl ether, by the end of this year.

California thus represents a test case on use outside the Midwest of fuel ethanol. If Congress passes comprehensive energy legislation this year, it likely will require that 5 billion gal/year of ethanol distilled from grain or cellulose be blended into US gasoline as early as 2012. The ethanol mandate would replace the federal requirement that reformulated gasoline contain 2 wt % oxygen.

California is a test because of its distance from sources of grain-based ethanol. Midwestern states, home to those sources, already use gasoline containing the alcohol and embrace the blend because it lifts demand for corn and its derivatives.

Less welcome

Fuel ethanol receives less welcome on the East and West Coasts. Those areas lack not only economies dominated by agriculture but also the transportation facilities required to import ethanol. Ethanol must be kept separate from petroleum during transport and storage.

Assuming that the new equipment and special handling will raise fuel costs if ethanol is forced into gasoline, many lawmakers representing coastal states oppose the mandate. California and New York have unsuccessfully sought exemption from the oxygen requirement in reformulated gasoline. But the ethanol mandate, already part of energy legislation passed by the House, has strong bipartisan support because of its appeal to agricultural interests.

At the request of Rep. Doug Ose (R-Calif.), EIA analyzed the role of the ethanol transition in California's spurt in gasoline prices earlier this year. The report, published this month, is preliminary. A final report is due in September. However incomplete, the early report is instructive.

California's switch from MTBE to ethanol is still under way. By summer, 60-70% of the state's gasoline will contain ethanol, EIA study says, compared with "very little" last summer. Much of the conversion was in progress during February and March, when fuel prices spiked.

But isolating ethanol's contribution to the price rise isn't easy. The average retail price of gasoline, excluding taxes, in March was $1.577/gal in California—23% more than the US average. During all of 2002, when the average prices were lower, the California-US spread was 12%. The major growth in March came in refining costs and profits, which the study calculates by subtracting the average price of crude from the spot gasoline price: 52.57¢/gal for California vs. 22.36¢/gal for all of the US. Because California has stricter standards for reformulated gasoline than other parts of the US, its costs are always higher. But the 135% difference in March compares with an 83% spread for all of last year.

Does that increase reflect the new costs of handling ethanol? Not necessarily, according to EIA. The agency attributes California's elevated gasoline prices in March mainly to the needs to distribute gasoline with MTBE and gasoline with ethanol at the same time and to extended turnaround periods for some refineries. Dual-fuel distribution will happen only this year. And unusually high downtimes by some refineries probably raised the profit components of cost-and-profit totals for others.

EIA thus can't point to significant cost created by use of ethanol. But it gave this warning: "While the problem of a market divided between MTBE and ethanol-blended gasolines will be resolved, a variety of issues will still remain that stem from the further loss of productive capacity that will occur when the remaining refiners shift to ethanol."

Capacity shrinks

The capacity losses will arise because volumes of ethanol needed to achieve required levels of oxygen in gasoline are less than those of MTBE. EIA puts the volume loss at 5% during winter and 10% during summer, when butanes and pentanes must be removed from gasoline blendstock to lower fuel volatility. Because of ethanol, therefore, Californian refining capacity in effect will shrink when the market most needs refinery products.

A national ethanol mandate will have comparable consequences on a grander scale. There will be costs. And the compulsion isn't fuel quality or environmental performance. It's farm-state politics.