Obstacles for higher ethanol content in US gasoline

The U.S. Environmental Protection Agency could announce as soon as Friday that it is delaying a decision on whether gasoline blended with up to 15 percent ethanol is safe for vehicles built between 2001 and 2006, according to a source familiar with the matter.

The EPA wants another month of testing before it announces the decision, which was expected in December, two months after the agency approved an increase in the maximum level of ethanol allowed in gasoline for cars made in 2007 or later.

In October the EPA decided to allow E15 gasoline in cars built since 2007, which would affect about one-third of the gasoline sold in the United States.

Despite the allowance, ethanol does face some challenges in rising to the new level.

STATES REQUIRING RFG

California, Connecticut, Delaware, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Texas, Virginia, Wisconsin, and Washington, DC.

RFG is required in the generally larger cities in each of these states, not in all areas. All of New Jersey and Delaware are treated as non-attainment areas.

REFINERS AND BLENDERS

The 15 percent maximum may require the production of a new sub-gasoline that will be formulated differently from the existing RBOB (reformulated blendstock for oxygenate blending) and CBOB (conventional blendstock for oxygenate blending).

The new "BOB" could further reduce the liquidity of gasoline markets and increase the number of different blends needed in different parts of the United States, according to analysts.

The 15 percent maximum may increase liabilities for refiners and blenders, since segregated storage and blending tanks will have to be used for the new RFG blend. Congress and the regulators will have to produce new storage guidelines.

While refiners and blenders can collect a Renewable Identification Number (RIN) credit of 45 cents per gallon produced, current and forecast high prices for ethanol are making RFG blending much less profitable.

Refiners and blenders routinely pass the credit to consumers in the form of lower gasoline prices, but the higher percentage of ethanol in the mix might lead to higher prices for the fuel.

Refiners and blenders could benefit from increased fuel sales since ethanol has a lower energy content and reduces the overall fuel economy of a gallon of gasoline.

ETHANOL PRODUCERS

Ethanol production takes places generally in the middle of the United States, while most of the markets for it on the coasts. Since pipelines cannot transport it, most ethanol deliveries to terminals are made by trains and trucks, which drives the price of the oxygenate higher.

Ethanol producers need the increase to 15 percent in RFG in order to meet the Clean Air Act mandate of 15 billion gallons of ethanol to be mixed into gasoline per year by 2015. The mandate for 2010 is 12 billion gallons.

CONSUMERS
High current and forecast ethanol prices could also make gasoline more expensive at the retail level. Some studies suggest the higher ethanol content will decrease miles per gallon in all cars.

CONGRESS

Many of the subsidies in place for ethanol expire at the end of 2010. The lame duck Congress may have trouble with extending the the current subsidy and tariff regime or modifying it before the end of the year.

One proposal on the table would be to shift the RIN credit to ethanol producers and away from refiners and blenders.

source: reuters