How a Plan to Boost Ethanol Would Reverberate Across the US

Source: Analysis by Jennifer A. Dlouhy, Bloomberg • Posted: Tuesday, February 7, 2023

Ethanol, the intoxicating alcohol found in beer, wine and liquor, has been powering automobiles in the US since the era of the Model T. Beginning in the 1970s, when oil supplies were strained — and as worries rose about the environmental damage caused by fossil fuels — the US government adopted policies to encourage use of corn-based ethanol and other alternatives to petroleum-based gasoline. The governors of some corn-producing Midwest states are now demanding a policy change that would increase ethanol use in their region and have ripple effects across the nation, including on prices charged at service stations.

1. What’s holding back use of ethanol?

E10 gasoline, the most commonly sold blend in the US today, contains 10% ethanol. A 15% blend known as E15 is also available, but only at about 2,700 of the nation’s more than 150,000 filling stations, and it’s not allowed to be sold between June 1 and Sept. 15. That’s due to anti-pollution provisions in the Clean Air Act that limit gasoline’s volatility, or evaporative potential. (Summer heat boosts the evaporation of all liquids, including gasoline.) Excessive volatility is generally defined as a reading over 9 pounds per square inch of Reid vapor pressure (RVP). Even E10 normally exceeds that threshold, but in 1990, Congress granted it a waiver to go beyond RVP requirements by as much as 1 psi. Despite having a similar volatility, E15 has never received the same exemption via federal law.

2. What changes are governors seeking?

The governors of Iowa, Minnesota and several other Midwest states are pressing the Environmental Protection Agency to stop giving E10 a pass from the volatility requirements in their states. That would put both E10 and E15 on the same regulatory footing — and potentially encourage more sales of the higher-ethanol option. Ethanol has particular political and economic significance in the US Midwest, which grows the bulk of the country’s corn and mills much of it to produce the biofuel.

3. Why would that cause ripple effects?

There is no ethanol in raw gasoline, known as blendstock; oxygen additives are incorporated later, right before retail sale. To ensure E10 sold in those Midwest states has a lower volatility and can meet the summertime limits, the blendstock itself would have to be less evaporative, too. In practice, the RVP of that unblended gasoline would be low enough so that when ethanol is added to it, the finished fuel — whether E15 or E10 — satisfies the requirements. One way for refiners to reduce the volatility of blendstock is to add less butane, a cheap hydrocarbon used to lower the cost of gasoline.

4. What would those ripple effects include?

To satisfy the new demands of Midwest states along with existing requirements elsewhere in the US, refiners would need to construct storage tanks and other infrastructure to keep different blends segregated. The Midwest could find itself more dependent on a smaller subset of refiners and therefore more vulnerable to supply disruptions when those facilities undergo maintenance or outages. (The EPA can waive fuel requirements — including volatility — under emergencies.) Pipelines that currently specify the grades of fuel they carry would need to make modifications and add new equipment. And filling stations that choose to offer E15 might have to upgrade or replace existing tanks, pumps and other gear to dispense the fuel.

5. How would gasoline prices be affected?

In the short term, prices for E10 would almost certainly increase as infrastructure changes are passed on to consumers. One estimate sees prices rising by at least 2 cents per gallon in the affected states. But the extra cost could be more than offset for motorists choosing cheaper E15. When the EPA issued emergency waivers allowing summer sales of E15 in 2022, it sold for nearly $1-per-gallon less than E10 in some areas, with a nationwide average discount of 16 cents per gallon, according to an industry-commissioned analysis. Over time, additional E15 sales could contribute to a gradual reduction in US demand for petroleum, potentially helping to lower consumer costs, especially during oil supply squeezes like the one that caused gasoline to surge last summer.

6. When might all this happen?

The EPA is considering the governors’ request and is expected to ask soon for public comment on the issue. Ultimately, the agency has little discretion under federal law to deny the change, though it can postpone the shift for at least a year, and extend the delay by two more years, if it concludes there is insufficient gasoline supply. Refiners and pipeline operators have pleaded with the EPA for more time to adapt, arguing it will take two years to get necessary infrastructure permitted and built.

7. Will this actually result in more ethanol sales?

Eventually. The current summertime restrictions are a headache for filling-station owners that sell E15 because it forces them to change out labels and tanks to accommodate the seasonal timeout. If that burden is lifted, then those stations will be able to sell E15 year-round — and competitors may follow suit. Ethanol is authorized for use in 96% of cars and light trucks on the road (those built in 2001 and later). But some consumers might be wary; though E15 is cheaper than E10, it also contains less energy — so motorists can’t travel as far on a gallon of it.

–With assistance from Chunzi Xu.