Economists: Octane premium offsets ethanol energy penalty

By Susanne Retka Schill | March 16, 2017

Ethanol critics bash the fuel for its lower energy value than gasoline, while ethanol supporters point to its octane-boosting properties. University of Illinois ag economists Scott Irwin and Darrel Good analyze the value of ethanol in blended gasoline over the past decade based on those components in a recent FarmDoc Daily post, “On the Value of Ethanol in the Gasoline Blend.”

Much of the analysis of the cost of ethanol relative to CBOB has ignored the potential benefit of the octane-enhancing qualities, particularly in the face of the reported retooling of refineries to producer lower-octane base fuels that need to be oxygenated to meet specifications.  Many analyses focus only on ethanol’s energy deficit compared to gasoline, the economists point out.

The economists lay out their methodology underlying their economic analysis to determine the net benefit of ethanol, when looking at energy-adjustments and octane-enhancements. The analysis includes charts that compare the price of ethanol to CBOB, and then the energy-adjusted price of ethanol, which increases due to its lower Btu content. It also looks at the cost of aromatics, the petroleum-based oxygenates used instead of ethanol, and the shift in use from aromatics to ethanol in one state over the past decade.

 “As expected, the energy-adjusted price of ethanol (assuming ethanol has only two-thirds the energy value of CBOB) was consistently higher than the price of CBOB by an average of $1.02 per gallon. On the other hand, the price of ethanol was consistently below the price of aromatics, considered as alternative octane enhancers, by an average of $1.06 per gallon.”  That calculates to the net value of ethanol, which though just 4 cents per gallon, calculates to “nearly $7 billion over the nine-year period from 2008 through 2016.”

The net benefit was highest in 2012 during the decade examined, Irwin and Good report. “The reason is that gasoline prices were high enough relative to ethanol to reduce the energy penalty, while at the same time lofty aromatic prices drove the octane premium to high levels. The large negative net value in 2016 is essentially driven by the reverse of the 2012 price patterns.”

Limitations to the analysis, the authors point out, include other factors not examined that could impact value, such as the value of Reid vapor pressure and the lower energy value of aromatics. “The bottom-line is that a refinery optimization model is needed to conduct a complete analysis of value of ethanol in the gasoline blend. Nonetheless, our analysis points out the partial and misleading nature of work that only focuses on the energy penalty of ethanol and ignores the octane premium.”

To view the complete analysis click here.