Uptrend in U.S. Gasoline Use Lifts Ethanol Demand

AgMRC Renewable Fuels Monthly Report
November 2015

Dr. Robert Wisner
University Professor Emeritus and Biofuels Economist
Iowa State University
Ag Marketing Resource Center
rwwisner@iastate.edu

Because ethanol demand is constrained by the 10% “blend wall”, U.S. domestic demand for ethanol is directly related to the amount of gasoline motorists use.  For several recent years, the nation’s gasoline use trended downward in response to high prices and a weak economy, as well as increased automobile fuel efficiency. Declining gasoline use has led to substantially lower gasoline use than projected when the 2007 energy legislation was passed. That legislation established RFS 2 and a requirement that 15 billion gallons of conventional biofuel (corn starch ethanol) be blended in the nation’s gasoline in 2015. The downward trend in gasoline use has caused some to suggest the RFS mandates need modification.

In this article, we review longer-term trends in U.S. gasoline use, causes of the recent uptrend, and influences on that trend from a longer-term perspective, as well as the trend in domestic fuel ethanol use.

Long-term Trend in U.S. Gasoline Use

The Energy Information Administration (EIA) in the U.S. Department of Energy is the organization responsible for publishing data on various types of energy production, distribution, and inventories. It does not directly measure use of gasoline and other fuels. However, EIA does publish a series titled “U.S. Product Supplied of Finished Motor Gasoline” (i) that can be considered a close approximate measure of gasoline consumed. Figure 1 shows the trend in gasoline supplied since 1980.

When the 2007 energy legislation was passed in December of that year, the trend suggested that with a 10% average U.S. ethanol blend in the nation’s gasoline, the 15 billion gallon mandate could easily be accommodated by 2015. However, the sharp down-turn in the U.S. economy, increased unemployment, relatively high gasoline prices, and a shift toward more fuel-efficient vehicles led to a downward trend in gasoline use that continued from 2008 until 2012 when annual gasoline use reached a low of 133.1 billion gallons.  Since that time, use has trended modestly upward. The 2015 projection in Figure 1 is the total consumption from August 2014 through July 2015, and is 139.4 billion gallons. That is 2.2% above the same period a year earlier and 4.7% above the annual 2012 low point. Actual 2015 consumption could vary slightly in either direction from this number.

Impact on Ethanol Demand with 10% Blend Wall

The uptrend of in gasoline use of the last 3 years is slightly positive for ethanol demand. If this trend continues in 2016, it would raise U.S. gasoline use to about 142.5 billion gallons, thus creating a domestic market for 14.25 billion gallons of ethanol plus whatever additional demand may be created by use of blender pumps at retail gasoline stations.  The 142.5 billion gallons of gasoline consumption, if it materializes, will be an increased market for ethanol of about 940 million gallons when compared with the 2012 low point. That would be an additional market for approximately 335 million bushels of corn at ethanol plants. After adjusting for DDGS replacement of corn in livestock and poultry feeding and exports, it would provide an increased demand for corn from about 1.5 million acres at a U.S. yield of 168 bushels per acre.

What’s Behind the Upward Trend in Gasoline Consumption?

Several developments are behind the recent increase in gasoline use.  Lower prices are an important contributor along with a somewhat stronger economy and increased sales of larger vehicles. Figure 2 shows U.S. retail gasoline prices since January 2007. (ii)  Most of the recent decline in prices started in July of 2014. Since the up-turn in use began in 2013, the price pattern suggests the improving economy may have contributed more to increased gasoline use than lower prices, although the lower prices in the last 15 months have reinforced increased gasoline consumption.

Another contributor to increased gasoline use has been increased miles driven by motorists. Figure 3 indicates that miles driven monthly turned sharply upward beginning in March 2014. From that date to July 2015, miles driven increased approximately 4%, to a new record high. (iii) The period of down-turn in miles traveled began in late 2007 and continued at the reduced level for nearly three years. At the low point in late summer 2011, miles driven were 3.2% less than at the peak in late 2007.

Will the Upturn in Gasoline Consumption Continue Long-term?

In the five to ten year outlook, gasoline consumption will be influenced by a number of additional factors including government energy and vehicle policies, and automobile technology developments. 

A key policy element is the corporate average fuel efficiency (CAFÉ) standards for new vehicles. As shown in Figure 4, these standards will increase sharply in the next several years. An important driver of the increased fuel efficiency mandates is concern about greenhouse gas emissions and their contribution to climate change. A related goal is reduction of crude oil consumption.   New light truck manufacturers are making changes to help meet these requirements, including turbo-charged engines, aluminum frames and body parts, and small high-efficiency diesel engines.

In the decade ahead, other new technologies may become important in meeting the tightening CAFÉ standards, including longer-range electric cars, compressed natural gas vehicles, and greater use of turbo-charged engines. (iv)  

One factor that may partially offset increased CAFÉ standards is the composition of auto sales by size of vehicle. CAFÉ standards for light-duty trucks typically are lower than for cars.  In the 12 months ending September 30, large, mid-size and small U.S. new car sales all were below a year earlier. The total sales of these classes were 2.4% less than in the previous 12 months. At the same time, sales of light-duty trucks, which typically are less fuel efficient than cars, were up 11.7% from the year earlier period. (v) It this trend continues in the next few years, it will temper but not completely offset increased CAFÉ standards for cars.

Increasing Availability of Blender Pumps

Another variable that will affect future ethanol use in addition to the volume of gasoline consumed is the average ethanol blend percentage. Blender pumps offer a way for motorists with 2001 and newer vehicles to select E-15 ethanol blends, which have been approved by EPA. These pumps may also be used by motorists with flex fuel vehicles who prefer to use a lower blend than E-85 but a higher blend than E-15. Blender pumps are available at a large number of stations in Minnesota and the eastern Dakotas, and in smaller numbers in other Midwestern states. (vi) USDA's Farm Service Agency has funding to assist in making more blender pumps available at retail gas stations in 21 states. (vii)

However, a major constraint on use of E-15 is failure of EPA to extend a Reid vapor waiver to this ethanol-gasoline blend.  When gasoline and ethanol evaporate, volatile organic compounds are emitted into the atmosphere and contribute to ozone formation. That becomes a problem during warm weather in many areas. To deal with this concern, EPA issued regulations prohibiting sales of gasoline and/or ethanol blends with Reid vapor pressure exceeding 9.0 pounds per square inch (psi) in volatility attainment areas and 7.8 psi in volatility non-attainment areas. Non-attainment areas are those where ozone standards are not being met. These standards are applicable from June 1 to Sept. 15 and from May 1 through Sept. 15 and apply to refiners, importers, distributors, resellers and carriers. EPA has issued a waiver for E-10 blends, but not for E-15. (viii)  Lack of a waiver restricts E-15 sales during late spring and summer months. Legislation was introduced into both the House and Senate last spring but has not yet been passed.  

Implications for the Ethanol Industry

U.S. gasoline consumption has moved into a short-term uptrend that will modestly increase the potential market for fuel ethanol in 2016 and possibly longer.   Increased gasoline use has resulted from an improving economy, increased miles driven, and motorists’ response to recent lower gasoline prices.  However, the upward trend in use appears likely to be short-lived because of large government mandated increases in corporate average fuel efficiency standards of new cars and light trucks.  The full impact of these new more stringent fuel mileage requirements on gasoline and ethanol consumption will take several years to occur as older vehicles are worn out and replaced with newer more efficient models.   In the meantime, increasing use of blender pumps at retail stations may increase ethanol’s share of the domestic motor fuel market.  However, the need for the Reid vapor waver to be approved by Congress and EPA is still a constraint on E-15 use in a number of states.

References

i  U.S. Energy Information Administration, “Product Supplied of Finished Motor Gasoline”

ii Data source: Energy Information Agency, “Weekly Retail Gasoline and Diesel Prices” (including taxes)  

iii Data source: Federal Highway Administration, Policy and Governmental Affairs Office of Highway Policy Information, “Vehicle miles traveled, Highway Statistics Series”   

iv For more discussion on meeting the CAFÉ standards, see Parisa Bastani, John B. Heywood, and Chris Hope,  “Potential for Meeting Light-duty Vehicle Fuel Economy Targets, 2016-2025, MIT Energy Initiative Report January 2012, Massachussets Institute of Technology, National Highway Traffic Safety Administration, “Proposed Rulemaking for Greenhouse Gas Emissions and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles–Phase 2Draft”, and Wards Auto, “Meeting CAFE Standards in the Current Environment” - March 11, 2015  

v Wall Street Journal, Market Data Center, “What’s Moving: U.S. Auto Sales”, October 12, 2015

vi  Google: “Blender Pump Locations” 

vii  Farm Futures, “21 states will get ethanol blender pumps under USDA grants”, September 11, 2015  

viii  Wickipedia, “Reid vapor Pressure”, EPA, “E-15: Frequently asked questions”, JRM Advisors, “Big Oil creates barrier for consumer choice Unnecessary regulation stifles sales for many local gas stations,” and  V.F. Anereson, James E. Anderson, T. J. Wallington, Sherry A. Mueller, and Ole John Nielsen, “Vapor Pressures of Alcohol−Gasoline Blends”, Energy Fuels,  2010, 24, 3647–3654  DOI:10.1021/ef100254w