Intermediate Term Issues for U.S. Biofuels, Part I
AgMRC Renewable Fuels Monthly Report
Dr. Robert Wisner, biofuels economist and university professor emeritus,
Iowa State University
After more than two decades of slow but nearly steady growth, the U.S. biofuels industry shifted into an eight-year phase of explosive growth that began in 2002 as shown in the chart below. (1) The very rapid growth was in corn-starch ethanol production and was followed soon afterward by emergence and growth of the biodiesel industry. The biofuels industry is now moving into a third phase characterized by cellulosic ethanol production. There will be several challenges in marketing the production from this new source of biofuel feedstocks in the same market as corn starch ethanol if production reaches previously envisioned levels. Challenges facing the industry reflect policy issues and a very different motor fuel market than envisioned when the December 2007 Energy Independence and Security Act (EISA) was passed and formed the basis for U.S. ethanol policies.
The new environment includes:
- Automobile standards allowing higher blends of ethanol than the traditional E-10 (10% ethanol-90% gasoline),
- A crude oil price war between OPEC and non-OPEC nations,
- Rapid growth of U.S. crude oil production, and
- Government fleet-average automotive fuel mileage standards that are set to increase dramatically in the next few years.
Other potentially important elements in the outlook include ethanol prices that until the last few months have offered very low-cost energy when compared with liquid fuels from crude oil, and world corn production that has increased rapidly in response to higher corn prices, recovery from the historically severe 2012 U.S. drought, and new production technology.
With the right combination of government policies and other economic conditions, further growth in U.S. production and use of both ethanol and biodiesel can occur in the next several years. However, the growth appears likely to be much slower than in the first decade of the 21st century. In this article, we examine some of the issues facing biofuels and their implications for the ethanol industry. This is the first in a series of articles discussing other aspects of the emerging environment. In the next issue, we will look at impacts on ethanol economics and corn prices from the sharp decline in crude oil and gasoline prices.
U.S. Position in World Ethanol Market
The U.S. is the world’s largest fuel ethanol producer, as shown in Figure 2. When 2014 data become available, U.S. production will have slightly exceeded the 2013 level. In the last eight years, the U.S. ethanol industry has substantially increased its share of global production. Most U.S. production is used domestically. That is also the case with the world’s No. 2 producer, Brazil. Brazil’s production has stabilized In the last few years, due to less-than-ideal weather in parts of its sugar growing region, competition from other crops, and a need to re-plant a significant part of the sugar cane crop. Sugarcane plants need to be replanted only every 6 or 7 years. That fact helps to keep production costs low, along with use of the biomass from the cane as the heat source for ethanol plants.
Europe, China, and Canada are other smaller ethanol producers, but their production is far below that of the U.S. and Brazil.
With its mature industry, large production capacity, and a dependable supply of feedstocks, the U.S. is in a strong position to maintain or expand ethanol exports in the years ahead.
Ethanol Saturation in a Shrinking U.S. Motor Fuel Market
When Congress passed the EISA, U.S. gasoline use was expected to continue its long-term upward trend that is shown in Figure 3. If that had happened, a much larger domestic biofuels market would have developed. For example, continuation of the long-term trend would have put 2014 U.S. gasoline use at nearly160 billion gallons per year instead of actual use at approximately 134 billion gallons. Ethanol blending as a percent of the nation’s gasoline supply is now very close to 10%, creating a domestic fuel ethanol market of about 13.4 billion gallons. If the long-term trend had continued, a 10% blend would have generated a market for about 16 billion gallons of ethanol. The reduced gasoline use reflects several factors including improved automotive fuel mileage, the rationing effect of higher fuel costs, unusually low labor-force job participation, and a sluggish economy. In the next 7 to 10 years, several developments may further reduce the size of the domestic gasoline-ethanol market. However, lower gasoline prices may temporarily halt the downward trend or cause a slight temporary increase in gasoline use.
Increasing Government Automobile Fuel Mileage Standards and Other Factors Likely to Bring Additional Intermediate-term Shrinkage of Fuel Market
Increased Automobile Fuel Mileage — Looking ahead for the next few years, sharply increased government fuel mileage standards for cars and light trucks are likely to cause a continued down-turn in the size of the U.S. gasoline market. These standards are called Corporate Average Fleet Efficiency or CAFÉ standards. The fleet average requirement for cars in 2014 was 34.5 miles per gallon. In 2025, under current regulations, it will be 54.5 miles per gallon – an increase of 58%. With that standard, motorists with new cars ten years from now would be able to drive the same number of miles as with current models, with nearly 60% less fuel. There will be a time-lag in fully translating the higher mileage standards into aggregate fuel demand as older cars wear out and are recycled.
Recent information from the University of Michigan and the Energy Information Administration (EIA) in the U.S. Department of Energy indicate the industry actually achieved fuel mileage slightly exceeding the CAFÉ standards for the years 2012 through 2014. This raises the possibility that actual fuel mileage on new vehicles in 2025 might exceed the CAFÉ standards. (2)
Hybrid and Plug-in Electric Vehicles — these vehicles are a small part of the current U.S. and foreign vehicle fleets. Recent estimates place the U.S. hybrid fleet at 3.1 million vehicles in a total fleet of 212.3 million vehicles. Global estimates place the total hybrid fleet at 59 million vehicles. Future sales of these vehicles will depend on such factors as technological improvements, tax policies, prices of the vehicles vs. gasoline or diesel alternatives and fuel prices. Plug-in electric vehicle sales in the U.S. since 2008 are reported at approximately 260,000 vehicles, with around 600,000 worldwide. (3) One company, Telsar, has recently announced plans to produce an electric car with a 200 to 260 mile range per charge. An industry source indicated its expected price for a basic model might be about $35,000 -$40,000 on a model to be available in 2018, after a tax credit. However, the current model S with that per-charge mileage range sells for approximately $70,000 before federal and state tax incentives and has seating capacity for up to 7 persons. (4) Charging takes about 6 hours. General Motors plans to have a new electric car called the Chevrolet Bolt to be in production starting in 2018. The Bolt is expected to have a 200 mile per charge range. Industry sources indicate its price may be around $30,000 after a federal tax credit. (5) Nissan also plans to have an electric vehicle within the next two or three years with a range of 249 miles (400 kilometers) between charges. (6) The prices, mileage range, time required for recharging the battery, and lack of facilities away from home for recharging will limit sales of plug-in electric vehicles to some extent along with current lower gasoline prices. However, many commuters may find the 200-250 miles per charge without use of gasoline to be attractive. Future technological and infrastructure changes may increase the attractiveness of these vehicles in the next several years. Also, increased sales volumes may lower their prices in the future.
Hydrogen fuel-cell vehicles —Toyota plans to produce a fuel-cell car in 2015 that will have a 415 mile range and can be recharged in three minutes. The car will initially be available in Japan, with plans to make it available in the U.S. later in the year. In the U.S., It is likely to be sold first in California, a state that has strict air quality regulations and is likely to more quickly accept such vehicles than other states. The price of the car is reportedly will be about $70,000. (7) Ethanol could be one of several sources of hydrogen production, depending on cost and technological developments.
Possible combustion engine technology changes — With the sharp increase in U.S. natural gas production, there is interest in the use of compressed natural gas (CNG) as a motor fuel. California air quality standards also provide an incentive for use of CNG vehicles. Natural gas involves a number of challenges including the design of vehicle fuel tanks and need for widespread refilling infrastructure. It is uncertain whether CNG vehicles will have a significant impact on gasoline and ethanol demand in the next few years.
Another technology in the experimental state is very high compression gasoline-ethanol dual super-charged engines with precise computerized combustion chamber fuel injection & varying ethanol-gasoline blends on demand from the engine’s computer. Research on a small General Motors V6 engine shows the possibility of fuel efficiency, torque, and horsepower similar to that of much larger diesel engines. Commercialize this technology, If it becomes feasible, might help to meet sharp increases in government- mandated fuel mileage and could possibly expand the demand for ethanol. (8)
Export Potential for Ethanol
The large and technologically dynamic U.S. ethanol industry and an almost certain continuation of the long-term upward trend in U.S. corn production are key elements that should help keep U.S. ethanol competitive in world markets. U.S. ethanol exports increased by 43% from a year earlier in 2013-14. Destinations are a wide range of countries including several in the Far East, North America, Europe, and some Persian Gulf petroleum producers. Exports totaled 828 million gallons in 2010-11, reaching a peak of 1,086 million in 2011-12, dropping to 554 million, in response to the 2012-13 drought-reduced corn crop, and increasing to an estimated 792 million gallons in 2013,-14. (9) Some analysts expect U.S. ethanol exports to range from 950 million to one billion gallons per year from 2015 to 2020, although the total will depend on future gasoline prices. (10) If crude oil and gasoline prices would stabilize at prices moderately above early January 2015 levels, expanding U.S. ethanol exports could be a possibility in the next several years. Many nations still use MTBE as an oxygen and octane enhancer in gasoline. This additive was banned in many areas of the U.S. because of possible carcinogenic aspects and concern about contamination of public water supplies. Ethanol has now replaced it in the U.S. If other nations would shift away from MTBE, that would open up a sizable market for ethanol exports.
The U.S. ethanol industry will face a number of important challenges in the next several years including a saturated and shrinking domestic market for gasoline, an uncertain retail motor fuel industry reaction to E-15 ethanol-gasoline blends and blender pumps, and changing automotive technology. Blender pumps allow motorists with flex-fuel vehicles to select ethanol blends above 10% but less than E-85. Their widespread use at retail gasoline stations could lead to some increase in the U.S. average ethanol blend. New automotive technology being developed includes electric vehicles with longer mileages between charges than has been available in the recent past, as well as non-liquid fuels such as compressed natural gas and fuel cells. It is uncertain how rapidly these technologies will emerge. If they are price competitive, new technologies could accelerate the decline in U.S. domestic demand for liquid motor fuels. Another area likely to create a challenge for the ethanol industry is sharing of the limited domestic ethanol market by (1) corn starch ethanol and (2) cellulosic ethanol. Increasing mandates for cellulosic ethanol will tend to shrink the domestic market for corn starch ethanol.
Some of these issues will be discussed in more detail in later issues of this series.
1 Data for the chart are from Energy Information Administration, U.S. Department of Energy, with projections for 2014-15 based on WAOB, USDA November 2014 projections of corn ethanol used for ethanol in 2014-15 and soybean oil used for biodiesel. http://www.eia.gov/totalenergy/data/annual/index.cfm#renewable
2 From Michael Sivak as reported by Michael Jewison at OEC, USDA on 12/4/14
3 Wickipedia, “Plug-in Electric Vehicle” http://en.wikipedia.org/wiki/Plug-in_electric_vehicle
5 “hevrolet Bolt EV Concept: 200-Mile Electric Range, $38K”, Car and Driver: http://www.caranddriver.com/news/chevrolet-bolt-ev-concept-photos-and-info-news
6 “Can You BeLeaf It: Nissan Promises 240-Plus-Mile Range for Next Leaf”, Car and Driver: http://blog.caranddriver.com/can-you-beleaf-it-nissan-promises-240-plus-mile-range-for-next-leaf/
8 Source: http://news.pickuptrucks.com/2009/03/ricardo-boosts-ethanol-engine-technology-using-gm-motor.html
9 USDA Feed Grain Data Base, Table 32. Ethanol Exports by Destination