US EPA Ethanol Decison Postponed

The US EPA has postponed to mid-2010 any decision to change ethanol limits in the US.  Last week I described why such a decision is anxiously awaited.  (HT/Xavier).

US Ethanol Decision Soon

As I mentioned at the beginning of May there is an oversupply issue with ethanol. Ethanol in the US is alcohol produced mostly from corn. US government mandated minimum ethanol volumes exceed what auto makers say most of their cars can handle. Typically cars can handle 10% ethanol blended with 90% petroleum-based gasoline without any special equipment.

The New York Times is reporting today that the US EPA may raise the US ethanol blend wall from 10% of gasoline to as high as 15% or 20% within the next week. Although such a change would be good for ethanol producers, this additional ethanol would displace petroleum-based gasoline and pressure oil refinery margins lower.

Update: On Tuesday December 1, 2009 the EPA announced it would defer making a decision on changing the US ethanol blend limit until mid-June 2010.

Petropolis and the Brazilian Ethanol Subsidy

This past week has been a big one for Brazil. It was announced that the country will host the 2016 Olympics in Rio de Janeiro.  Brazil had already being chosen to host the 2014 soccer World Cup. This was also a week of optimism about Brazil's petroleum sector with large expanded claims about deep offshore oil fields being made.

Although the US is the largest producer of ethanol by volume, ethanol accounts for a larger percentage of Brazil's transport fuel use.  Ethanol is the same alcohol in beverages (don't drink from the fuel pump though as there are many often poisonous additives - see footnote below about the bottle in the picture to the right).

In Brazil, most ethanol is made from sugarcane. In the US most ethanol is produced from corn, which is a less efficient energy-wise and a more expensive process. The US does not have the same Brazilian Amazonian conditions to grow such large sugar volumes.

One of the observations I made during my time here was that ethanol prices are extremely low at Brazilian pumps compared to gasoline.  I wondered: how this could be with twenty year high sugar prices (US24 cents per pound) and moderate petroleum crude prices (US$70 per barrel)?

A little background first:  all gasoline at Brazilian retail stations must by law contain at least 25% ethanol, with the other 75% being petroleum-based gasoline.  This blend is known as E25.  Most Brazilian retail stations have two pumps: one for E25 snf one for ethanol. All gasoline in the US must contain at least 10% ethanol (E10) and it tends to be only in the US midwest corn belt that second pumps offering high (E85) ethanol blends exist.

The US has a 54 US cents per gallon tariff on ethanol imports.  The US tariff is to try to prevent non-US ethanol producers from taking advantage of the hefty 51 US cents per gallon subsidy which ethanol producers in the US receive in order to kick start and scale up US ethanol production.

The US ethanol tariff effectively eliminates the ability of Brazil to export ethanol to the US. Brazil has no import tariff on ethanol.

Brazil has no ethanol subsidy now (it did until the 1990s) and Brazil has called many times for the US to remove its 54 cents per gallon import tariff.

However, in reality Brazil does subsidize ethanol by heavily taxing gasoline.  E25 Gasoline in Brazil is roughly US$5.15 per gallon at the retail pump at the moment (BRL 2.40 per liter).  Ethanol in brazil is currently US$2.95 per gallon (BRL 1.39 per liter).  This equates ethanol to 58% of the cost of E25 gasoline.  Ethanol should be around  of 70% the cost of E25 gasoline based on the mileage it permits.

The high Brazilian tax on E25 gasoline is effectively a clever ethanol subsidy.

You may wonder why everyone in Brazil doesn't switch away from petroleum gasoline to ethanol?  They are, with around 94% of new vehicles sold being flex fuel vehicles capable of burning high ethanol blends.  It tends to be imported luxury vehicles and older non-luxury vehicles which still use E25 gasoline.

(note on the picture above: the bottle contains a mineral water from the Brazilian city of Petropolis, which is named after Pedro, the second and last Brazilian Emperor, rather than petroleum.  I can vouch from my one bottle that the water is tasty and does not contain any hydrocarbons.)

Brazilian Exceptionalism

Brazil is exceptional with its beautiful beaches, vast lush land mass and optimism (sounds like the US). I am currently in the center of the scaled biofuels world and it literally smells sweet - at least for Brazil. That sweet smell is alcohol in the air. The alcohol (ethanol) is being derived from sugar cane which rich rainforest cleared land and climate permits. Ethanol produced from sugar cane is used as a fuel for vehicles here on a scale no other country has ever been capable. No other country can replicate Brazil's unique cleared rainforest climate and soils.

Brazil has also recently discovered a lot of relatively high cost conventional hydrocarbons a ways offshore - although this oil is at least five to ten years away from production.

Brazil is an exception in so many way that one wonders if it should be used as an example. I will be posting some observations over the next few days. The first is how well the economy appears to be doing here. Factories are producing, office workers are optimistic, restaurants and stores are busy, the woes of debt laden developed nations and consumers are far from consideration. Demand is good for everything Brazilian.

Twist in the US Ethanol Saga

Widespread use of ethanol (an alcohol produced mostly from corn in the US) in gasoline is relatively new to the US. Legislation in the US (EPACT-2005 and EISA-2007) mandates minimum gallon amounts of ethanol to be added to US gasoline. The amount of gallons mandated increases each year.

Most gasoline in the US now contains some ethanol. If you live in the US and look closely at a gasoline pump you will likely see a little notice saying "contains up to 10% ethanol". 10% ethanol and 90% petroleum gasoline is the blend level at which most modern gasoline powered vehicles require no modification (check your vehicle owner's manual).

The minimum mandated gallons of ethanol to be added to gasoline was not a blending percentage issue until US motorists began to buy less gasoline in the recession of 2008 (annual declines in oil consumption are quite rare - the last major declines occurred in the early 1980s). Now gasoline blenders have minimum gallons of ethanol to add to gasoline, but because of the recession these minima may require blending up to 15% ethanol into gasoline.

You may not care about ethanol blend percentages, but you should as the guys who made your car and gas stations are worried.

Automobile manufacturers are expressing concern that their vehicles may not be able to cope with greater than 10% ethanol in gasoline. Retail station owners are also objecting to the higher blend percentages which could damage storage and pump systems.

The US EPA is investigating how to handle the issue and a ruling is expected later this year. The law is clear and so the EPA has to somehow finesse the ethanol into gasoline or hope for a swift recovery and growth in US gasoline demand.

(Note that ethanol is not widely used as a gasoline additive outside the US and Brazil. Oil 101 describes ethanol in detail)