The conflict between specialized motor fuel blends’ air-quality benefits under normal supply conditions and the logistical problems they create when supplies are restricted came quickly into the open as the House Energy and Commerce Committee began hearings May 10 on gasoline prices, supplies, and formulations.
“In addition to the difficulty of balancing environmental and fuel-supply concerns, actions to ease distribution problems by reducing the number of gasoline formulations could increase average gasoline production costs and reduce overall gasoline supply capacity,” said Howard K. Gruenspecht, deputy administrator of the US Energy Information Administration.
Shortage reports have increased attention to these specialized or “boutique” fuel formulations, which are developed by regional, state, and local air-quality agencies and approved by the US Environmental Protection Agency, according to William Wehrum, acting assistant administrator for air and radiation at EPA.
“The cost of producing boutique fuels does not translate to increased prices to the consumer at the pump,” he said. “EPA has concluded that under normal conditions, the existing distribution works well. However, if there are disruptions from hurricanes or refinery fires, boutique fuels can limit supplies.”
Nevertheless, moving to a single, national motor fuel blend in an effort to lower retail prices could backfire, Gruenspecht warned.
“A single, very clean gasoline standard would certainly enhance fungibility, but it would also affect US refiners’ ability to produce enough gasoline to meet overall demand. Considerable investment in what might otherwise be devoted to capacity expansion would be diverted to building the systems needed for more intensive processing,” he said.
A standard US gasoline blend, if set at stringent levels, also could eliminate imports from some foreign sources, he added. “Even though greater fungibility would reduce the potential for short-term regional supply shortages and price spikes, consumers could end up facing a higher national average price for gasoline than they would under the present regime. Timing, balance between supply and distribution, and potential future fuel specification and vehicle changes all need to be considered when trying to address this issue,” said Gruenspecht.
Many other factors
Rep. Joe Barton (R-Tex.), the committee’s chairman, noted that many factors besides boutique fuels have lifted gasoline prices this spring, citing higher crude prices and the rapid switch from methyl tertiary butyl ether to ethanol as an oxygenate in reformulated gasoline.
“Increasing our domestic ability to produce and deliver the finished product of ethanol-enhanced gasoline is something that America hasn’t done as a nation across the entire continental United States,” Barton said.
Committee members also said additional domestic refining capacity is needed. Republicans urged simplified expansion permit processing, while Democrats said they would revive their 2005 proposal to create a strategic refining reserve.
Gruenspecht said that in 2005 US ethanol demand was 265,000 b/d. EIA calculated that replacing MTBE would require a further 130,000 b/d of ethanol production. Total US fuel ethanol output reached about 300,000 b/d in February, but much of the additional production was diverted from the Midwest to East Coast and Gulf Coast reformulated fuel areas that previously used MTBE. “We are importing about 22,000 b/d from Caribbean countries and Brazil. My understanding is that the world market is going to be tight and more won’t be available,” he said, adding that an estimated 50,000 b/d of ethanol production capacity is due to come on line in the next 6 months and more beyond that.“There have been some transitional issues. Most of them are behind us,” Gruenspecht said.
Brazil’s example
Some committee members wanted aggressive measures on alternatives to petroleum.
Rep. Jay Inslee (D-Wash.) said, “In Brazil, unlike this country, they decided to have a real energy policy that gives consumers alternatives to gas and oil. Ford Motor Co. and General Motors both make cars that run on both. We need a flex-fuel car industry here so Americans can have that choice.”
Brazil increased its sugar cane production by a factor of three to produce more fuel-grade ethanol, he said.
“Last week, they celebrated total energy independence. Meanwhile, we’re waiting to build our first commercial cellulose ethanol plant in southeastern Idaho. All it lacks are the necessary loan guarantees.”
Brazil’s recent landmark was the start-up of an oil field that later this year will push the country’s oil production to a level slightly higher than its oil consumption (OGJ, May 8, 2006, Newsletter). Gruenspecht pointed out that ethanol now costs about the same as gasoline “plus 50¢” but provides two-thirds as much power as gasoline does.
“If you can get ethanol competitive on a fuel-value basis, it would be good,” he said. “Brazil has an advantage as one of the world’s lowest-cost producers of sugar because of its temperate climate. It also allows significant offshore oil and gas development, which also helps reduce pressure.”
He said the biggest ethanol delivery problems this spring have been in Texas, where rail bottlenecks have delayed shipments. “The ethanol delivery problem has not been fully solved, but it is improving,” he said.
Ethanol imports
Rep. John B. Shadegg (R-Ariz.) said the US should suspend tariffs on imported ethanol, adding that a bill he has introduced to do this has the support of President George W. Bush, House Speaker R. Dennis Hastert (R-Ill.), and 29 cosponsors. “The reality is that we won’t be able to produce enough domestically in the next 12 to 18 months to replace the MTBE that has been withdrawn from the market. There’s no reason to continue to require American consumers to pay the additional tax,” Shadegg said.
Rep. Tammy Baldwin (D-Wis.) said the choice is between continuing policies that benefit oil companies or developing alternatives to reduce dependence on foreign oil.
“We have to begin encouraging production of alternatives. In Wisconsin, annual ethanol production has risen from 40 million to 200 million gal and eventually will reach 500 million gal,” she said.
Gruenspecht said in his written testimony that EIA forecasts US ethanol use in fuel will grow to 10 billion gal/year by 2012, assuming extension of the ethanol tax credit.
This would slightly exceed the renewable fuel standard contained in the Energy Policy Act of 2005, he pointed out. Even without extension of the tax credit, US ethanol use should still be above the renewable fuel standard in 6 years, he said.
EIA projects that nearly all of the additional ethanol will come from corn, with cellulose contributing only about as much as required, according to Gruenspecht.
“While cellulose ethanol has potential feedstock-cost advantages compared to corn ethanol and tremendous progress has been made in the performance and cost of enzymes used in the conversion of cellulose material to ethanol, the high capital cost of cellulose ethanol plants remains a significant barrier to their economic competitiveness,” he said.