Hitting the blend wall

Gasoline consumption in the U.S. is down. The double edge sword is that while the ethanol industry trumpets the need to replace foreign oil imports by using renewable fuels, if overall gasoline consumption goes down, so does ethanol blending.
By Susanne Retka Schill | March 05, 2012

Gasoline consumption in the U.S. is down. Cars are more efficient and consumers are driving less, plus ethanol blending is being done to the max. Some predictions say gas prices will not only top $4, but rise towards $5. I’ve read reports recently that suggest that U.S. drivers will begin to change their habits drastically at these higher prices. The double edge sword for the ethanol industry is that while it trumpets the need to reduce our reliance on foreign oil imports by using renewable fuels, if overall gasoline consumption goes down, so does ethanol blending. If that happens, the volume required before hitting the blend wall goes down.

For the non industry, casual reader, the blend wall is set by the 10 percent limit to blending ethanol in gasoline, with the exception of fuels sold to flex-fuel vehicles that are approved for higher blends such as E30 or E85. FFVs make up under 20 percent of the car pool, but with the sparse availability of blender pumps in the locations where the majority of those FFVs are located, the market share is much less.

Last year, the collision with the blend wall was helped by two things. A 5 percent ethanol blend mandate took effect in Canada and Brazil’s ethanol production was way down, prompting a huge increase in ethanol exports to the EU to fill in the gap. Will those two markets continue to soak up supplies this year?

I had an interesting conversation with an industry insider from Canada at the National Ethanol Conference that gives a bit of insight on the situation up north. He pointed out the Canadian  5 percent blend mandate requires roughly 2 billion liters. The country’s ethanol production capacity is right around 1.8 billion liters, and they are importing about 1 billion liters. So they have a 3 billion litter supply, but only need 2 – what’s happening with the other 1 billion?  His guess – they are blending up to 10 percent on favorable economics. We would expect the lion’s share of that 1 billion liters exported to Canada comes from the U.S.

What we’ve been reading about Brazil indicates that country’s ethanol exports won’t rebound too quickly. One reason is that domestic demand is increasing. Another is that sugarcane production is down. Multiple crops can be harvested from the same planting, but production drops as  cane fields age and for various reasons, replantings have been delayed. There will be a time lag before new plantings are at their prime again and production volumes pick up.

There’s a third factor that may become important to the market. Skeptics would say E15 doesn’t stand a chance to penetrate the U.S. market any time soon. One would expect, though, that in the Corn Belt there are plenty of consumers and retailers who support ethanol. We’ve been reporting that Iowa and Illinois have things in place to roll out E15 when the final regulatory approvals are in place. I heard at the NEC that the industry is focusing on the Midwest for the initial E15 rollout. Not long after, I read elsewhere that if just 10 Midwestern states were to adopt E15, it would take the pressure off the blend wall.

People who market ethanol for a living would no doubt add layers of complexity to my basic analysis. The biggest worry, of course, is that since the blend wall has been reached by the corn ethanol industry, where will cellulosic ethanol find a market? Cellulosic ethanol and advanced biofuels have carved out volumes in the renewable fuels standard. Expanding the market for blending is critical for these to succeed.