Trends in U.S. Gasoline and Ethanol Use and Petroleum Production and Imports
AgMRC Renewable Energy & Climate Change Newsletter
Dr. Robert Wisner
Several decades ago, the U.S. was a net exporter of petroleum products.However, that picture has changed dramatically in recent years as gasoline consumption trended upward and environmental constraints on new wells plus declining production from existing wells failed to keep pace with rising domestic demand. U.S. energy policies in the early 1990swere altered to encourage increased production of biofuels, in part because of a desire to reduce the nation’s dependence on imported oil.In this article, we review the nation’s consumption of gasoline and ethanol in recent years, including response of consumer demand to sharply rising gasoline prices. We also look at the level of U.S.dependence on imported oil and trends in imports in the last few years.From these trends, we see a picture of modestly reduced domestic gasoline use in response to high prices, increased blending of ethanol with gasoline, and continued large but slightly reduced U.S. petroleum imports. Also, despite relatively stringent environmental constraints,industry sources indicate oil drilling in the U.S. is increasing.
Figure 1 shows annual U.S. gasoline and ethanol deliveries since 1995.These data come from the U.S. Energy Information Agency. (1) They are an approximate measure of the nation’s domestic gasoline and ethanol use. For 2011, we have extrapolated January-May seasonally adjusted use to annual average equivalents. Actual use for the current year may differ somewhat from our extrapolation as additional monthly data become available. U.S. gasoline use had been in a long-term upward trend for many years before peaking at 142.3 billion gallons in 2007, after which gasoline prices increased sharply. Our projections for 2011, if they materialize, will show a 5.9% decline in the nation’s gasoline use since the peak. Peak consumption occurred just before the peak in world oil prices in the spring of 2008. A significant part of the decline since then has been due to increased blending of ethanol with the nation’s gasoline supplies, as indicated in Figure 1. The combined volume of gasoline and gasoline-ethanol blends has followed a slightly different pattern than gasoline alone. Rather than peaking in 2007, it temporarily declined in 2008 and 2009, but increased to set a new record high in2010. The 2010 usage was 1.2% higher than in 2007. Data for the first five months of 2011 suggest that this year’s total use of motor fuel for spark-combustion powered vehicles (combined gasoline and ethanol volumes) may be down about 2.2% from last year. Future trends in the nation’s use of these fuels will depend on a number of factors including the health of the economy and employment levels, automotive technology,the rate at which consumers accept hybrid automobiles, and the possibility of a sharp increase in government-mandated fleet average fuel mileage requirements in the years ahead that has recently been advocated by administration officials. Blending of ethanol with gasoline is mandated to increase sharply in the 2012-2022 period, but a number of constraints noted later in this article may prevent mandated levels from being fully achieved.
Trend in Gasoline-Equivalent Gallons
A gallon of ethanol has about two-thirds the energy that is contained in a gallon of gasoline. Although it has a substantially higher octane rating than gasoline, EPA fuel mileage tests with E-85 (85% ethanol and15% gasoline) indicate fuel mileage in flex-fuel vehicles declines by about the same percentage as the difference in energy content. (2) A similar percentage decline is believed to occur when ethanol is used inE-10 blends, which are widely used across the entire country. After adjusting for differences in energy content, a slightly different picture of U.S. motor-fuel usage emerges, as shown in Figure 2 below.With this adjustment, total use reached a peak in 2007. Projections based on January-May 2011 data show a 2.6% decline in 2011 from that peak. Additionally, equivalent gallons of gasoline replaced by ethanol are 8.5 billion gallons, vs. 12.7 billion gallons of actual ethanol volume projected to be blended with gasoline. Eight and a half billion gasoline-equivalent gallons is equivalent to 6.3% of the nation’s projected total gasoline use. This big-picture perspective also indicates the upward trend in U.S. gasoline use may have been halted by the combined effects of a depressed economy and historically high gasoline prices.
Where is the ethanol industry relative to the blend wall?
Figure3 shows both the combined gasoline use and ethanol in gasoline-equivalent gallons, and ethanol use as annual percentages of the nation’s gasoline supply in ethanol volumetric gallons. The U.S.average blend increased slowly from 0.3% in 1995 to 0.5% in 2001. From2002 onward, in response to increased government incentives for ethanol production and use, the average blend increased rapidly, reaching an estimated 8.7% in 2010. Tentative projections indicate the national average blend may increase to about 9.5% this year. Most of that will be in the form of E-10, which is acceptable for all gasoline-powered cars and light trucks. The E-85 market is an alternative outlet for ethanol,but as we indicated in a 2010 article, it is limited in size by
- The small percentage of the nation’s auto fleet that is made up of flex-fuel vehicles,
- The limited number of retail gas stations that offer E-85, and
- Lack of price competitiveness of E-85 in many areas of the U.S., when reduced fuel mileage is taken into account. (3)
The number of flex-fuel vehicles is expected to increase substantially in the next several years since most major manufacturers are committed to making production of these vehicles a much larger percentage of their total production. However, it is not clear how quickly the number of E-85 stations may increase. On the price-competitiveness issue for E-85,if the $0.45 per gallon blenders’ tax credit is eliminated as seems likely, it will be more difficult for the petroleum industry to make E-85 competitive with E-10 and E-0. (4) To adjust for the fuel mileage reduction, E-85 needs to be priced at approximately a 26 to 28%reduction to gasoline. Keeping ethanol prices that much lower than gasoline for a large volume of output has risk of reducing profitability of ethanol producers, depending on the price of corn, which is their major feedstock.
As Figure 3 above indicates, the nation’s fuel supply is rapidly approaching a 10% average blend. That level represents an approximate blend wall because of the limited size of the E-85 market. Not all motorists will use ethanol blends. Where pump labeling allows consumers to choose between unblended gasoline and ethanol blends, some motorists may still prefer straight gasoline. Also, various off-road users in some cases are concerned about ethanol effects on outboard motors, small engines for generators, air compressors, lawn mowers, and similar equipment used in construction, other industries, and recreation and home applications. These other users and individual consumer preferences may make it difficult to reach a precise 10% U.S. average ethanol blend unless the E-15 market emerges. The Environmental Protection Agency(EPA) has approved use of E-15 in cars and light trucks built from 2001onward. However, the retail industry has been slow to move into the E-15market for several reasons. One is the added cost of additional pumps and tanks, as well as limited space for the extra tanks in some cases.Blender pumps – which can be used at retail stations to produce a number of different ethanol-gasoline blends – have been approved by the federal government and can help solve these problems. However, retailers also have expressed reluctance to market E-15 because of lack of approval by the auto industry warranties and concern about possible liability issues with motorists and auto manufacturers. Some auto manufacturers have expressed concern about possible damage to vehicles from the higher blends, with special concerns about impacts on emission control equipment. (5)
Figure 4 shows the seriousness of the blend wall for the ethanol industry. Government ethanol blending mandates stemming from the 2007 U.S. Energy Independence and Security Act (EISA) (6) specify that an increased amount of ethanol is to be blended in U.S. gasoline each year from now through 2022. Corn-starch ethanol mandates increase to a peak of 15 billion gallons in 2015 After2015, the increase is to come from cellulosic ethanol and advanced biofuels that reduce greenhouse gas emissions (GHG) by 50% or more from the EPA base. (7) The zero line of Figure 4 represents a national average ethanol blend of E-10, with 138 billion gallons of ethanol being used annually. As noted earlier, gasoline use may fall slightly below that level this year. If that gasoline use pattern continues or declines further, the blend wall would be reached sooner than indicated in Figure 4. In Figure 4, the blend wall is projected to be reached in2013. For 2022, 22 billion gallons of ethanol are mandated to be blended with the nations’ gasoline supply. With gasoline use remaining at the138 billion gallon level, 22 billion gallons of ethanol would produce a U.S. average blend of approximately 16%. If the nation’s gasoline use were to decline by 1% each year from 2012 through 2022, a U.S. average blend of about 18% would be needed. Combined gasoline and ethanol use in equivalent gasoline gallons in 2022 would be about 4.6% less than our projections for 2011. With the very sharp increase in government-mandated average car and light truck fuel mileage to 54.5miles per gallon by 2025 that has recently been proposed, actual gasoline use might be even lower. (8) That would require a higher ethanol average percentage blend to incorporate the mandated ethanol gallons into a lower volume of gasoline.
Whether actual ethanol blending reaches the 22 billion gallons mandated by EISA for 2022 will depend heavily of progress of the cellulosic ethanol industry. Technology for cellulosic ethanol production has emerged much more slowly than envisioned by those who developed EISA. At this writing a handful of pilot plants are either in operation or under construction. Several smaller commercial plants are planned to be in operation in the next few years. Government actions on the cellulosic blenders’ credits will be very important for that portion of the ethanol industry. Loss of those incentives for use of cellulosic ethanol would be a strong negative signal to cellulosic ethanol investors. (9)
Alternatives for removing or raising the blend wall include the following:
- Incentives for the retail industry to invest in blender pumps
- Steps to remove retailer and auto industry concerns about liability issues with E-15
- New automotive technology to reduce the mileage-reduction from E-85
- Possible development of “drop in” fuels that don’t require engine modifications and can be transported in conventional pipelines
One type of “drop in” fuel that may possibly emerge in the next few years is biobutanol. A few ethanol firms are planning to convert some of their ethanol plants to butanol. At this writing, we are not aware of any published estimates of costs for such conversion. Butanol has the added advantage that its fuel mileage reduction is less than that for ethanol.It can be produced by a fermentation process that is compatible with dry-mill ethanol plants, and the process would also produce distillers grains. Product yields would differ some from those of ethanol. Butanol can be shipped in existing pipelines, thus tending to reduce transport costs and increase its competitiveness with gasoline, when compared with ethanol. (10)
Other types utilize heat, pressure, and catalysts in the processing operation rather than fermentation. Costs of producing drop in fuels from cellulose using this type of process vs.costs from fermenting cellulosic feedstocks are not known at this writing.
In the years ahead, a combination of these various alternatives may emerge to help overcome the blend wall, at which point the ethanol market becomes saturated. From the ethanol industry’s perspective, removal or raising of the blend wall will be a high-priority issue in the years ahead.
Has U.S. dependence on imported oil declined with the rapid growth in ethanol production?
Figure5 shows U.S. crude oil and petroleum product imports in millions of barrels since 1981. The trend was strongly upward from 1985 through2005. Since then, however, the nation’s petroleum imports have declined,in volume terms although not in dollar value. The volume of Imports in2010 was 14% less than at the peak level in 2005. That is a decline of701 million barrels or 29.4 billion gallons. Part of this decline can logically be attributed to the renewable fuels industry, although other factors also were at work.
U.S. Petroleum Imports by Origin
Figure6 shows U.S. petroleum imports by country or region of origin for the combined period of December 2010 through the first five months of 2011.The largest single-country source of U.S. imports during this period was Canada, although the non-Persian Gulf OPEC countries as a group supplied a larger total volume of U.S. imports than Canada. Mexico was the second-largest individual country supplying U.S. with oil imports.Canada and Mexico together supplied slightly more than two and one-third times the oil that U.S. imported from Persian Gulf OPEC members.
Non-Persian Gulf OPEC countries accounted for about one-fourth of total U.S. petroleum exports. Slightly less than one-half of U.S. imports came from Mexico, Canada, Russia, and several other smaller oil exporting nations. The Virgin Islands are included in this group although they are part of the U.S.
Figure 7 below, indicates U.S. petroleum imports from Persian Gulf OPEC nations has trended downward since the mid- 2000s. Although a number of other factors were involved, growth in production and use of ethanol in the U.S. likely was also an influence on this trend.
In the last seven years, the U.S. fuel ethanol industry has experienced phenomenal growth. In volumetric terms, its production is rapidly approaching 10% of the nation’s gasoline supply. The 10% level is very significant to the industry since it represents an approximate blend wall at which the domestic market for fuel ethanol is expected to become saturated in the short run. The export market currently is providing some growth potential, as we noted in an earlier article. (11) Its future depends heavily on future global sugar supplies and demand, and may not be as dependable as the domestic market. Accordingly, future growth of the U.S. ethanol industry will depend heavily on progress in overcoming the blend wall, as well as its competitiveness with gasoline and possible emergence of various “drop in” fuels that don’t require engine modifications and can be transported in existing pipelines.
As the ethanol industry expanded rapidly in the 2005-2011 period, the nation’s petroleum imports declined modestly in volume measures. Imports from Persian Gulf countries also declined. A portion of these declines can be credited to dramatic growth of the ethanol industry. Even so, the EIA indicates that the U.S. is still very heavily dependent on foreign oil supplies. EIA data indicate 49% of the U.S. petroleum supply was imported in 2010. (12) With historically very high crude oil prices,that represents a severe strain on the nation’s net balance of international trade. We will discuss these issues in more detail in a future article.
1 U.S. Energy Information Administration, Petroleum and other Liquids, Supply and Disposition Data
2 EPA web site showing fuel mileage of E-85 for various makes and models of vehicles.
3 Wisner, “Is E 85 ethanol blend competitive with E0 outside the Midwest? “, Renewable Energy Newsletter, September 2010
4 This conclusion is based partly on EPA auto mileage web, site, op. cit
5 Don Bain, “Higher ethanol authorization drawing fire from automakers”,Torque, August 7, 2011, “New E-15 ethanol gasoline blend coming soon could pose big problems”, Naples News, June 27, 2011, Consumer Reports, Warranties void on cars burning E15, say automakers, July 7,2011, and Wisner, “Is E 85 ethanol blend competitive with E0 outside the Midwest? “and “Issues in Raising Allowable Ethanol-Gasoline Blends to E-15 or Higher for Conventional Vehicles”, Renewable Energy Newsletter, August 2009
6 Energy Independence and Security Act of 2007
8 Andrew Restuccia, “Obama tightens fuel-economy standards,” The Hill E-2 Wire, July 27, 2011
9 Wisner, “Proposed Biofuels Mandates for 2012 and the Blend Wall,” Renewable Energy Newsletter, July 2010
10 For an example of an ethanol plant being converted to biobutanol production, see Mark Steil,
“SW Minn. plant to switch from ethanol production to isobutanol,” Minnesota Public Radio, March 28, 2011
11 Wisner, “Ethanol Exports: What’s the trend and where are they being shipped,”, Renewable Energy Newsletter, March 2011
12 U.S. Energy Information Administration, “Frequently Asked Questions: How dependent is the U.S. on foreign oil?”