As we reported in an earlier newsletter several months ago, the American Petroleum Institute (API) commissioned a study by Sierra Research, Inc., that reviewed all the state and federal regulatory changes required for the implementation of E15 in the gasoline pool. The key point of this study is the introduction of a new transportation fuel in the United States that faces a large task of changing a labyrinth of federal and state regulations to bring new E15 fuel legally to market. All the big hoopla about the EPA’s approval of a waiver allowing E15 to be used in automobiles model year 2001 and later is only a first step in the approval process. Overall, Sierra Research suggests that full adoption by federal and state governments for the entire US is a 2-4 year process. When taking a closer look at the Sierra Research report, it is interesting to note that 24% of the nation’s gasoline demand is located in states that require legislative action, and not just regulatory action. Regulatory action is much easier in the sense that the vast majority of bureaucrats inhabiting regulatory agencies support E15, and will move quickly to change the necessary framework. State legislators, on the other hand, with a large majority becoming Republican since the last election, are inherently hostile to ethanol subsidies unless they are from a Corn Belt state reaping the rewards of the current ethanol policy. We think the change in the political landscape in the US after the recent election is significant in terms of potential legislative impediments to ethanol expansion via E15 gasoline. Outside of the Corn Belt, Republicans now control both houses of state legislatures, where 45% of the gasoline demand exists. An argument can be made that, with the mood of the country pushing back against the imposition of federal regulations, state legislatures may actually legislate proactively against the adoption of E15.
Assuming that a large part of the country is inherently hostile to E15, how does the industry capture enough incremental ethanol demand from E15 to break through the E10 blend wall and meet the 15 billion gallons of corn based ethanol in 2015? In addition, depending on developments in California surrounding the ability of Midwest corn-based production to meet carbon intensity reductions required by the California Air Resources Board , the corn-based ethanol industry faces the potential of losing some portion of the 1.4 billion gallons per year of California ethanol demand somewhere between 2013 and 2016. With US gasoline demand predicted to reach 9,100,000 barrels per day by 2012, according to the EIA, 100% adoption of E10 will result in 14 billion gallons of ethanol consumption balanced against an RFS2 mandate of 13.8 billion gallons for 2013. So, by 2014, E10 will no longer create enough demand to meet the mandated volume of 14.4 billion gallons, which is the proverbial blend wall. We assume, for this analysis, that the “Advanced Biofuel” mandate requirements are either deferred due to lack of cellulosic ethanol production, or biodiesel usage expands to meet the “Advanced Biofuel” mandate, requiring no additional “Advanced Biofuel” ethanol to be blended into gasoline.
Politically, there are two areas of the country that will continue to support the use of Midwest ethanol and the expansion into E15: the states in the Midwest Corn Belt, and the Northeast corridor from Boston to Washington DC. The Midwest Corn Belt represents 15% of the gasoline consumed in the US, and moving from E10 to E15 will yield an additional 1 billion gallons of new annual demand from the region. The Northeast corridor represents 13% of the gasoline demand in the US, and moving to E15 will yield an additional 900 million gallons of new annual demand from the region. With the corn-based ethanol mandate growing to 1 billion gallons above the E10 blend wall, and a very large portion of California’s Midwest ethanol demand at risk, the adoption of E15 in the Midwest and the Northeast Corridor may be enough to get the corn-based industry to ts maximum mandate of 15 billion gallons in 2015 and beyond.
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