The Battle of the Ethanol Bulge

April 30, 2023 |

Lately I have been comparing in my mind the situation of the oil & gas industry today and the facts that faced the German High Command in the late autumn of 1944. Today, it’s a two-front war, EVs on the Eastern Front now winning titanic policy battles of encirclement and annihilation, while the numerically smaller forces of renewable fuels begin to sweep in along the Western Front. 

News arrived at weekend that the US Environmental Protection Agency used its emergency powers to grant a volatility waiver for E15, blends of gasoline and 15 percent ethanol, as plucky a move as Third Army’s breakout from the Normandy hedgerows in the late summer of 1944, with the liberation of Paris and sweeping towards the Rhine. It is the biggest acquisition of territory, if you’ll pardon the analogy, in the war between renewable fuels and petroleum since the authorization of E10 in the misty dawn of the industry’s existence.

As a result, consumers will continue to have access to the fuel option that is usually 10 to 20 cents per gallon less than E10. Without today’s action, fuel suppliers would have restricted distribution on May 1 and retailers would have been forced to stop selling E15 during the summer beginning on June 1.

The Iowa Renewable Fuels Association summed it up thus: “The EPA’s action means that E10 and E15 will have the same volatility limit for the summer driving season that runs from June 1 to September 30. With the same volatility limit, the same gasoline blendstock can be used for both 10 and 15 percent ethanol blends. This prevents oil refiners from gaming the system by supplying only the E10 blendstock and, thereby, freezing E15 out of the market.”

E15 has been a long time coming. It occurs to me that petroleum’s pooh-bahs have been taking a page out of Ulysses Grant’s strategy at Vicksburg, a tactic emulated by the German High Command in 1944. When confronted by enemies on two fronts, sweep forward to defeat the numerically smaller force in order to concentrate your numbers against the larger force. So, petroleum continues to oppose E15 ethanol, which offers lower prices and carbon to the consumer according to IRFA — rather than preparing for its ultimate battle, and expected defeat, at the hands of electric vehicles.

And so the smaller forces of ethanol, lay encircled in a fuel market version of Bastogne, outnumbered, outgunned, their cause thought to be hopeless, and yet they persevere through bitter fighting against almost insuperable odds. Then, a flash of supply planes and P-51 Mustangs above — or, in this case, belated support on summer ethanol from a Biden Administration prodded, pushed, chivvied, bullied and battered by an influential and bipartisan group of Midwestern lawmakers — shows that Bastogne may not fall, the German High Command’s thrust into the Ardennes may fail, and that the cause of renewable fuels will not be thrown back into the sea by the forces of fossil carbon. The Battle of the Ethanol Bulge may result in a victory for the good guys, 

The low gasoline stocks trigger

How did it happen? As IRFA explains, “EPA has the authority to issue emergency provisions based on the supply of fuel. Recently, gasoline stocks have fallen below 2022 levels when a similar emergency action was taken. In addition to restrictions on Russian oil and the impact of the war in Ukraine, this year OPEC also recently enacted supply reductions that have spiked fuel prices.”

It’s good news for the environment, POET observed in a statement lauding EPA’s move. “E15 is effectively blocked from the marketplace during the summer months because of an unintended wrinkle in federal law, despite having lower evaporative emissions than standard summertime gasoline. Just last year, research by the University of California Riverside reaffirmed that E15 reduces volatile organic compounds, carbon monoxide, and particulate matter that contribute to smog formation.”

The larger question: long-term ethanol demand

A battle has been won, but how goes the war? As with the endgame of the Second World War, another battle looms with the forces from the east — the arrival of the thundering Golden Horde of electrification sweeping across the steppe. Electricity is no longer content to dominate the world of power and heat, now they want transportation, and the P2X movement suggests that cover chemicals and materials as well. It has proven nigh impossible for petroleum and renewable fuels to form an Grand Alliance in the search for Net Zero fuels — there’s investment and cooperation, but on the small scale — so renewable fuels face the same problem that petroleum does, the expected loss of the light-duty market.

Says here, the Energy Information Administration (EIA) projections to 2030 indicate that U.S. motor gasoline consumption is expected to see changes ranging from a 4.5-billion-gallon decrease (3.3 percent) to a 7.2-billion-gallon increase (5.3 percent) from 2021 levels.

When will the shift begin? Perhaps now. Says here, speaking of the EIA, that overall gasoline demand dropped to 134 billion gallons in 2022  — that’s a drop of 7 percent since 2018. So, where’s the growth? Chemicals and SAF, that’s where. Let’s look at alcohol-to-jet again, today.

Pivoting to SAF

One of the challenges is making a gallon of SAF from ethanol that’s worth more than the 2.1 gallons of ethanol needed to make it. The Natural Law of Alternative Commodity Markets states that no producer will make a second product if the market value of the intermediates is higher. 

So, right now, Jet-A is selling for $2.27 a gallon  and ethanol is selling for $2.16, says here. Sounds like a NLACM problem. The difference has to be made up in carbon prices or by a trip to Lourdes to pray for an assistive change in market price structures. The more perplexing problem is how to move jet fuel towards a price somewhere around $5 a gallon. Therein lies a more realistic long-term opportunity for sustainable aviation fuels.

Is that possible? Right now, says here – US airlines get 58 miles per gallon per passenger.  So, a 600 mile flight (that’s around the average length, says here) should cost the average passenger $52 for the fuel, if fuel were priced at $5 per gallon. That doesn’t seem outrageous. It’s roughly $30 per ticket more than today’s market price. 

A better federal SAF tax credit

In the near term, voluntary airline commitments help. What I suspect will be the long term solution is to charge passengers for the carbon, in the form of a permanent refundable tax credit, to create a stable market for SAF and incentivizes airlines to adopt low-carbon fuels in order to gain market share.  The aim should be to bridge that $30 per ticket gap. The tax credit should go to the airline, not the producer. The credit should entirely relate to carbon. 

Such a tax credit incentivizes growers who take carbon out of their process, since their fuels will have higher value by having less carbon. It decarbonizes food, too. Airlines that decarbonize become stronger competitors — and can offer lower ticket prices. That’s value for money. And, it turns land into a form of energy storage, and a hedge against disruption in international trade or logistics. In war or trade disputes, the winner is often the one with better access to energy. The Allies had much more fuel in 1944 than the Axis, and it was a decisive factor at Bastogne.

So, how to win the Battle of the Ethanol Bulge? Yes, a bulging market for ethanol will come from E15’s adoption and success. But the longer-term market comes from addressing the Carbon Bulge of passenger and freight aviation. And providing more on domestic energy supply is good policy — as we have seen, international crises bring chaos to energy markets that can be best coped with by domestic abundance.

Critics will say that change is impossible, that a permanent carbon tax credit is impossible, that airlines should surrender in their efforts to decarbonize. To which I would reply, to quote General Anthony McAuliffe at the Battle of Bastogne: “Nuts”.

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