One year ago, the ethanol industry had weathered 12 months of opposition that balanced the tremendous growth and momentum of 2006. Many prepared for obstacles in the year ahead, but few could have predicted the shape and size of these challenges.
In 2008, industry leaders encountered difficult market conditions and intense political debates over biofuel policies ignited by PR attack campaigns. Perseverance became the name of the game. The people of America’s ethanol industry have fought to reinforce the value of ethanol in the public eye and to expand the availability of the fuel to American motorists who deserve choices – and savings – at the pump.
Mid-range blends top the priorities
The unveiling of the “Optimal Ethanol Blend-Level Investigation” in late 2007 set the tone for the year ahead, creating momentum behind the potential in ethanol blends beyond 10 percent.
The study – small in size but encouraging – disproved previous assumptions that ethanol’s lower energy content correlated directly to lower fuel economy. The research found that not only did higher ethanol blends perform well even in standard, non-flex vehicles, but it strongly suggests that there may be an “optimal” ethanol blend – likely E20 or E30 – at which vehicles will get even better mileage than with straight gasoline.
The blend level study was co-sponsored by the U.S. Department of Energy and the American Coalition for Ethanol and conducted by the University of North Dakota Energy & Environmental Research Center and the Minnesota Center for Automotive Research.
“This is a compelling argument for more research on the promise of higher ethanol blends in gasoline,” said Brian Jennings, Executive Vice President of ACE. “We encourage the federal government to move swiftly to research the use of higher ethanol blends and make necessary approvals so that American motorists can have the cost-effective ethanol choices they deserve at the pump.”
ACE began addressing the issue of mid-range blends in 2005 with its “ACE Fuel Economy Study,” a pilot study which tested the fuel economy of E10, E20, E30 in three standard, non-flex vehicles, and again the following year with the teardown and analysis of a 2001 Chevrolet Tahoe – non-FFV – which had run for more than 100,000 miles almost exclusively on E85. Ensuring a marketplace for blends beyond 10 percent remains one of the most pressing challenges for the U.S. ethanol industry and one of ACE’s top priorities.
Volatility in the marketplace
Undeniably, the challenges of the past year were some of the greatest the industry has faced. Volatility in the marketplace forced the U.S. ethanol industry to ride fluctuating commodity prices both up and down in 2008– a situation making risk management strategies critically important.
Driven largely by speculative investment, and also by growing global demand coupled with weather-related crop setbacks, the corn markets hit highs of nearly $8 per bushel in late June. Though by November corn prices had fallen to less than $4, the higher – and difficult to predict – corn prices had already pinched many ethanol plants’ margins.
The banking industry’s credit crisis also rippled in to the renewable fuels industry, its effects being felt by many ethanol production companies – both those with operating plants and with projects under construction.
All eyes were on oil prices in ’08, witnessing the historic march upward past $100 and near the $150 mark. Gas and diesel prices followed, making ethanol’s value as an alternative even clearer. But the country’s financial meltdown quickly curtailed the oil price hike, with economic uncertainty leading to slackening demand and softening prices. The fuels complex followed late in the year, pinching ethanol producer margins even more.
Calculating fuel price benefits over food costs
Despite facts to the contrary, the campaign to blame ethanol for food price increases gained a foothold again in 2008, led by the Grocery Manufacturers Association (GMA). Many in the media carried their story, leading to questions about whether ethanol’s demand for corn did indeed lead to higher food prices.
The State of Texas brought a case against ethanol to the U.S. Environmental Protection Agency, asking for a waiver from the Renewable Fuels Standard because, it said, the RFS was causing “severe economic harm” in the state. ACE and other ethanol industry leaders and supporters submitted formal comments to the EPA referencing the ample information showing two key facts: ethanol has little, if any, impact on food prices, but has a strong positive impact on the nation’s economy.
In response Jennings said, “Despite a dishonest PR attack campaign against ethanol, the facts clearly indicate that ethanol is part of the solution to U.S. energy security, economic security, and climate change concerns.”
One might argue the RFS waiver process was constructive because it brought the food and fuel conversation out of the realm of speculation and in to that of the facts. At the request of Senate leaders, the U.S. Departments of Agriculture and Energy studied the situation and brought forward their findings in a June 11 statement.
“It is clear, however, that biofuels are already moderating gasoline prices. That impact is likely to grow substantially as more biofuels come to market. Our preliminary analysis further suggests that current biofuels-related feedstock demand plays only a small role in global food supply and pricing. Moreover, the impact of biofuels on U.S. consumers is even smaller since the farm price of commodities accounts for less than twenty percent of U.S. consumers’ food costs,” stated the letter from Agriculture Secretary Ed Schafer and Energy Secretary Samuel Bodman.
The USDA-DOE analysis found that 96-97 percent of the increase in food prices was due to factors other than biofuels .
The EPA denied the Texas RFS waiver request in early August, signaling to the country that ethanol production should be credited with helping to moderate gas prices rather than be accused of driving up food prices.
More holes were shot in the food price argument in late fall as corn prices fell to half of what they had been earlier in the year, yet food prices did not follow.
“Big Grocery’s claims that ethanol and corn prices were to blame for their food price increases don’t add up. Now that commodity prices have fallen, consumers should ask where the savings are,” Jennings said. “Ethanol was a convenient excuse for a multi-million-dollar PR campaign to justify price hikes on American consumers.”
Ethanol’s economic benefit
As the USDA-DOE research found, ethanol has moderated gas prices, bringing welcome relief to American motorists who shelled out record amounts for transportation this year. A number of analyses have demonstrated ethanol’s benefits at the pump.
Merrill Lynch analysts stated earlier this year that if ethanol producers weren’t expanding their output, oil and gas prices would be 15 percent higher. The USDA-DOE research put a figure of 20 to 35 cents per gallon on the savings that ethanol offers at the pump. And a study by Iowa State University found that between 1997 and 2005, ethanol has caused retail gasoline prices to be 29 to 40 cents per gallon lower, depending on region of the country.
Ethanol’s economic benefit doesn’t stop at the pump, but reaches the national level as well. In May, the DOE’s Energy Information Administration (EIA) released numbers showing that ethanol, more efficient vehicles, and high oil prices have combined to cut oil imports for the first time since 1977. The EIA analysis shows that U.S. dependence on foreign oil is expected to fall from 60 percent to 50 percent by 2015, the same timeframe as the Energy Independence & Security Act of 2007 calls for U.S. biofuel production and use to approach 15 billion gallons.
Industry advancements continue
Despite the marketplace and PR challenges, the U.S. ethanol industry continued advancing in terms of production and production efficiencies. The DOE’s Argonne National Laboratory released a study that showed the increases in efficiency at America’s ethanol plants. Since 2001, dry mill ethanol production has achieved a 25 percent reduction in water demand and a 15 percent decline in demand for electricity. A total decline of 22 percent has been realized in terms of overall energy use in the ethanol production process.
Additionally in 2008, major fuel suppliers successfully tested ethanol shipments in existing pipelines and ethanol producers incorporated biomass gasification systems, fractionation processes, and other new technologies to advance ethanol production. Some companies, like ICM, pursued food and fuel production, which they anticipate will be a valuable task of the biorefineries of the future.
The gasoline shortages in the Southeast following Hurricanes Gustav and Ike reminded the country once again that having additional sources of fuel is so critically important. Instead of waiting for foreign nations to ship us gasoline, ACE advocated strongly for the federal government to look at a temporary waiver for E15 to be substituted for E10 in areas with shortfalls. Even if a temporary measure, increasing the ethanol content per gallon would save consumers significantly at the pump and allow time for the refining system to get back on its feet after the storm damage.
A big step forward for mid-range blends came this fall when the USDA and DOE released their “National Biofuels Action Plan,” which affirmed mid-range ethanol blends, stating that they “represent a critical pathway” to reducing our nation’s dependence on gasoline and achieving the President’s goal of reducing gasoline consumption by 20 percent in 10 years. Research followed out of DOE’s national labs on the successful use of blends beyond E10 in standard, on-road vehicles, finding no show-stoppers in the results. The full report and the research study can both be found online at Ethanol.org.
Late 2008 found the ethanol industry waiting for additional news on the carbon footprint of ethanol as determined by EPA’s proposed ruling for RFS2. EPA and others examined the lifecycle greenhouse gas emissions associated with biofuels and the effect that indirect land use changes have on biofuels’ carbon footprint. Industry leaders encouraged legislators to recognize ethanol as the cleanest, most viable fuel option available.
“In the context of examining the carbon footprint of the next BTU of transportation fuel, it is important to recognize that corn ethanol is getting more and more efficient, while the production of gasoline from oil is getting not only more and more inefficient, but more harmful for the environment,” Jennings said.
Preparing for 2009
Energy independence and ethanol made their way into the presidential debates of 2008, and the topic of incentives remained prevalent along the campaign trail. While the election of Barack Obama as the 44th president of the United States is historic for a number of reasons, it is clear that energy policy is important to voters.
According to a Des Moines Register article by Phil Brasher, John McCain’s opposition to farm subsidies and ethanol incentives may have swayed voter support in some rural areas. “Republicans say it hurt his campaign in agricultural counties that were key to President Bush’s narrow victory in Iowa four years earlier,” the November 7th article stated.
Jennings indicated that ACE and others in the ethanol industry are look forward to tackling critical challenges in 2009 with President Obama and the 111th Congress.
“We look forward to expanding ethanol market opportunities. We need a variety of alternatives to foreign oil, and ethanol is one alternative ready today,” he said.