Higher U.S. ethanol blends may face road blocks

WASHINGTON Thu Sep 30, 2010 12:09pm EDT

A process operator holds a handful of dried distillers grains, a protein animal feed that can be fed to livestock, at the GreenField Ethanol plant in Chatham, Ontario, April 10, 2008. REUTERS/Mark Blinch

A process operator holds a handful of dried distillers grains, a protein animal feed that can be fed to livestock, at the GreenField Ethanol plant in Chatham, Ontario, April 10, 2008.

Credit: Reuters/Mark Blinch

WASHINGTON (Reuters) - U.S. biofuel makers and corn growers are hoping the government will soon approve a higher level of ethanol in gasoline but a number of obstacles, including slow adoption at the pump, could hamper demand for the new fuel blend.

The Environmental Protection Agency is slated to decide by mid-October whether gasoline stations can sell gasoline with 15 percent ethanol, a fuel known as E15, for cars built in 2007 and after. The current maximum level is 10 percent.

Later this year the agency will decide whether gas stations can sell the higher blend for use in cars built from 2001 to 2006.

Ethanol makers asked for E15 because it could help boost sales of the alternative fuel, even if gasoline demand is static or falls.

They argue E15 is the only way to ensure that refiners and gas stations comply with a government mandate, put in place before the recession, requiring 15 billion gallons of ethanol to be mixed into gasoline per year by 2015. This year's mandate is 12 billion gallons.

The new fuel could also be good for corn markets and bad news for oil refiners as ethanol cuts into gasoline output.

But it's not certain that the permission to sell the higher blend would lead to more sales of ethanol, because gasoline stations may avoid the potential costs and liabilities of selling the fuel.

Here are scenarios of how fuel and corn markets could react to E15:

APPROVAL FOR NEW VEHICLES BUILDS SMALL MARKET: LIKELY

The EPA might approve the higher blend only for cars built in 2007 and after, but not allow the blends for older cars in a decision due later this year. If that happens, the E15 market would be small. Cars and light trucks built over the last four years make up about 29 percent of the overall U.S. vehicle fleet, according to the latest Department of Transportation data. They are also more fuel efficient, on average getting more miles per tankful than older cars.

Since gasoline stations would not be required to sell the higher blends, many may choose not to add additional pumps, which can be costly, rather than installing an E15 pump for a minority of customers.

APPROVAL FOR OLDER CARS BUILDS LARGE MARKET: NOT AS LIKELY

The E15 ethanol market would be larger if the government approves E15 use for cars built in 2001 and after. Cars and light trucks up to 10 years old burn 60 percent of U.S. gasoline according to the latest government data.

The higher blends could boost ethanol makers' demand for corn by 1 billion bushels a year, a 21 percent increase from current levels, on the way to meeting the 2015 mandate.

Some 36 percent of this year's corn crop, worth $20.6 billion at the farm gate, is expected to be used by ethanol distillers in the coming year.

If the renewable fuel mandate of 15 billion gallons a year is fully achieved by 2015, the higher blends will have helped displace about 50 to 70 million barrels a year of gasoline.

In this case, ethanol producers such as Poet, a private company, Archer Daniels Midland Co and Valero Energy Corp. could enjoy higher profits in their renewable fuels divisions.

Still, this scenario assumes that gasoline stations decide to make investments, such as additional pumps, to sell the higher blends. If corn prices are high relative to crude oil, there will be less incentive to use more ethanol than required by federal mandates.

(Graphic on U.S. corn prices and ethanol use: link.reuters.com/tun36p )

GAS STATIONS SAY NAY TO E15: SOMEWHAT LIKELY

If the EPA approves the blends for old and new vehicles, it does not guarantee that gasoline stations will adopt the new fuels. Adding additional fuel pumps is expensive, especially in urban areas. E15 could also be crowded out by other fuels, such as biodiesel and diesel.

In addition, some station owners may not sell E15 because of concerns they might be exposed to lawsuits if they sell the wrong fuels to vehicles. The concern is that higher blends could hurt fuel lines and engines in older cars.

This could push gasoline stations to pressure Congress to pass a liability protection law. But Congress does not always act quickly.

So-called "blender pumps" that let drivers chose which blend of ethanol they buy could help fix the problem. Some ethanol producer groups want federal incentives for these pumps to help filling stations pay for them.

But again gasoline stations, which operate on thin profit margins, may be slow to adopt the changes. It can cost up to $25,000 to install a blender pump, about twice as much as a regular pump.

E12 APPROVED FOR ALL CARS: UNLIKELY

Archer Daniels Midland applied for a waiver for a fuel with less ethanol called E12. Some ethanol groups want the government to simply allow all pumps to sell gasoline with up to 12 percent ethanol, saying it is safe for all engines.

But this scenario is unlikely as the latest Department of Energy tests are on E15, not E12.

An array of environmentalists, consumer groups, truck stop operators, car makers and recreational equipment manufacturers say E12 cannot be approved without thorough and independent testing of its effects on engines.

(Reporting by Timothy Gardner and Charles Abbott; graphic by Jasmin Melvin; Editing by Alden Bentley)