Who Should Want More Ethanol In The Pool? Would you Believe Oil Refiners?

Sound Crazy?  Maybe so, but not so crazy when you break it down.  First of all, we are seeing the slow turn of the wheel as the buzz of EVs is starting to wear off and we may be looking at a hangover.  They simply are not going to meet the projected level of market penetration in the next decades and the assumed benefits of efficiency and reduced emissions aren’t going to be there.

Secondly, not only are the current GHG and fuel economy standards going to be hard to meet,  but recent reports out of the Biden administration that they plan to get tougher on internal combustion engines in the next round of requirements really throws down a gauntlet.  With less EVs than modeled, and without new fuels like high octane, low carbon liquids, as my colleague Doug Durante has written many times in this publication, where are the gains in mileage and reductions in carbon going to come from?

The federal government can’t essentially dictate what we drive by setting standards that make the alternative impossible to meet.  We need new fuels, and those can be getting the most out of the old fuels.

Which brings us back to my thesis—as the pendulum swings back to internal combustion engines the quest for low carbon isn’t going to disappear. Reports last week in Reuters and other publications suggest we could be in for a springtime of hurt as U.S. oil refiners plan twice as many refinery overhauls this spring as usual. This is due to delayed maintenance from the pandemic as both human and material shortages put regular maintenance on hold. And the  lure of record-high margins at a time when America tends to hit the road in the warm weather is no small consideration either.

A nationwide E30 Clean Octane standard

This  triggered a few thoughts about how our petroleum refinery friends should be giving some serious thought as to why they should be at minimum receptive to—if not outright supportive of—a gradual transition to a nationwide E30 Clean Octane standard which would, like RFS1 and RFS2, see ethanol blends phase-in as production increases and new dispensers are installed  from E15 to E20 to E25 to E30 nationwide ten or so years from now.  This is a vision laid out in the Next Generation Fuels Act that Senators Grassley and Duckworth introduced in the Senate and more than 20 members have sponsored in the House.    Of course, there will be localized markets like what we are already seeing in South Dakota, Nebraska, and Kansas that will move quickly to E30 in the near-term, in the process improving local ethanol plants’ netbacks due to reduced transportation costs and higher ethanol values.

Near-term Ethanol Price Support?  US gasoline crack spreads today stand at $26/barrel.  US refinery capacity has declined considerably, and that which remains has been operating at unsustainably high capacity.  Turnarounds this spring should put upward pressure on ethanol prices in the near-term as refiners look for both supply extension and octane boosting support.  Gulf Coast exposure to hurricanes and other severe weather interruptions will only make gasoline/diesel shortages more frequent and more costly, especially for hard-hit consumers at the pump. 

Transition to E30 Will Not Necessitate Refinery Operational Adjustments.  Transitioning from today’s nationwide E10 to tomorrow’s nationwide E30 will on balance make petroleum refiners’ lives easier, not harder.  Operationally, they will continue to use the same crude oil slates and run the same configurations—except for turning down their high severity reformers as they reduce their need for BTEX/aromatics.  As the MathPro – GM/Ford linear program analysis confirms, as crude oil prices advance, reducing reformer use will actually save them money.  It should also increase their output of distillate/diesel, jet fuels, and other petroleum products to increase exports that will benefit their bottom line.

Refinery Emissions Will Be Substantially Reduced.  The MathPro LP study also confirmed that refiners would substantially reduce their CO2 and toxics/VOC emissions which will be increasingly important as EPA cracks down on stationary source carbon and toxics emissions.

Increased Use of Light Tight Oil Will Continue to Put Upward Pressure on Ethanol’s Higher Octane Value.   US refiners are using more of what is termed as Light Tight Oil which yields lower octane crude feedstocks. Enter ethanol to the rescue, providing the lowest carbon, lowest price, most bang for the buck octane available anywhere.

Refiners have for the most part drawn the line at 95 RON/91 AKI.  The problem is that 91 AKI does little to nothing for US goals to achieve fuel efficiency improvement, tailpipe carbon reductions, and/or Mobile Source Air Toxics (MSAT)  reductions which are increasing dramatically as GDI engines dominate the fleet.  Ultra Fine Particulates and related emissions will only get worse unless aromatic levels are significantly reduced, despite EPA’s assertions to the contrary. Ethanol blends at the 25-30% level can provide those reductions.

The EV rival available now

Adding it all up, refiners embracing a 94 AKI that Ford and others have concluded can provide as much as a 7% gain in efficiency changes the game at all levels. It allows Automakers to tweak compression in what are otherwise the same cars we drive today. In fact there are variable compression engines on the road today.  They rival EVs in efficiency, would represent no additional  cost,  and can come to market immediately. The daunting, perhaps insurmountable issues of recharging, battery development and disposal, subsidies, and consumer choice would then at a minimum be addressed in a more strategic manner rather than through the rose colored glasses the Administration is wearing.

Refiners would now have a fuel that meets GHG and efficiency rules, while meeting stationary and mobile pm reductions.

A final note with regard to the pendulum swinging back to the internal combustion engine: General Motors announced it is investing just under one Billion dollars in the development of its small block V-8 (8cylinder) engine that runs on—guess what?—gasoline. These engines power the truck and SUV segment of the GM line and represent the vast majority of their profits. While GM continues the company line that they will phase out all gas-powered vehicles by 2035, if they can produce a vehicle comparable to EVs in models people actually want and can afford, why would you give up on ICEs?

Embracing these realities now—which would protect their “enlightened self-interest” and enhance their bottom line—could insulate petroleum refiners from any future legal challenges, fines, and consumer backlash.  Working with the ethanol, agriculture, auto and other industries, they can be part of the solution, and not the problem.

David Hallberg is a former Congressional Staffer and Founder of the Renewable Fuels Association.