Sam Fletcher
Senior Writer
US demand for ethanol is outstripping supply and raising imports of the product, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.
US demand for ethanol jumped in May, he said in an Aug. 2 report. US Department of Energy data indicate the US rate of consumption of ethanol reached an average 5.4 billion gal/year in May, "well above the prior month's 4.7 billion gal/year average and the comparable year-ago rate," Rousseau said. "With domestic production at only about 4.5 billion gal, annualized, the shortfall in domestic supply was offset by a draw on inventories and a high level of imports, which explains why ethanol spot market prices rose as much as they did," he said.
"Although ethanol prices have since returned to more normal levels (currently $2.62/gal, according to Bloomberg), we believe it is important to note this inherent mismatch between supply and demand and what it suggests for future market prices," said Rousseau.
Brazil, a major producer of sugar cane, is the main exporter of ethanol. Thanks to a government push in the 1970s to develop other fuel resources and slash oil imports, ethanol is cheaper than gasoline in Brazil, and ethanol-ready cars accounted for most of the 1.7 million new vehicles sold there in 2005.
Officials in Washington, DC, are debating whether to lift the 54¢/gal tariff on imported ethanol until domestic production increases to meet US demand. The Energy Information Administration estimated that removing the tariff would increase US imports of ethanol by 10,000-20,000 b/d over the short run from current imports of 22,000 b/d.
But industry analysts claim Brazil likely could manage only a modest increase of 5,000-7,000 b/d of ethanol exports to the US in the short term. The supplier most likely to cash in on that market, they say, is China, the world's third largest supplier of ethanol.
E85 fuel outlets
Meanwhile, the Kroger Co. grocery chain, based in Cincinnati, Ohio, officially opened in June the first outlet in Houston for the retail sale of E85 fuel, a mix of 85% ethanol and 15% gasoline by volume. The single pump was installed at one of the company's existing retail gasoline outlets adjacent to one of its stores in northwest Houston.
That station recently was advertising its E85 fuel at 30¢/gal below the price of its regular unleaded gasoline. However, it is not yet selling much of the new fuel, pending distribution and sales of 2007-model vehicles with the flexible-fuel engines designed to run on either gasoline or ethanol. Putting E85 into a vehicle with a conventional gasoline engine would ruin the engine and fuel system, said Kroger officials.
A Kroger spokesman told OGJ that the company is not pricing its E85 below its actual cost to the company nor benefiting from any tax breaks or subsidies. However, he acknowledged that the company had reduced its profit margin on the fuel in order to encourage customers to buy flexible-fuel vehicles. Kroger officials would not say how much the store is squeezing its profit margin for the new fuel. Nor would they speculate as to whether increased demand for ethanol—made in the US primarily from corn—might drive up prices for corn, corn-fed beef, and products made with corn-syrup sweeteners in its grocery markets.
On Aug. 2, Kroger had the grand opening of a second E85 pump in Pearland, Tex., on the southern outskirts of Houston. Analysts who follow the alternative motor fuels market report that these are the only two E85 outlets in all of Texas. Branded stations for the major gasoline refiners have been hesitant to invest in tanks and pumps for the sale of E85 until they can assess public demand for the fuel.
Automotive sources say the new flexible–fuel vehicles require elimination of bare magnesium, aluminum, and rubber parts of conventional gasoline fuel systems and installation of fuel pumps capable of operating with electrically-conductive (ethanol) instead of nonconducting dielectric (gasoline) fuel. Also required are specially coated wear-resistant engine parts, fuel injection control systems with a wider range of pulse widths (for injecting approximately 30% more fuel), stainless steel fuel lines (sometimes lined with plastic), stainless steel fuel tanks, and in some cases, acid-neutralizing motor oil. Vehicles with fuel pumps mounted in the fuel tank require modifications to prevent electrical arcing.
Opponents claim that E85 contains only 72% of the energy of gasoline on a gallon-for-gallon basis. But proponents say fuel mileage with E85 is slightly better than the 28% difference.
(Online Aug. 7, 2006; author's e-mail: [email protected])