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The Mythical Ethanol Threat

There have been many claims in recent years that ethanol is going to help wean us off of fossil fuels. In fact, many of our political leaders claim that as long as we just keep subsidizing the ethanol industry, eventually cellulosic ethanol will take over and we will all motor happily along on E85. We are making energy policy decisions based on this assumption.

As this analysis will show, the data we have to date don’t support those kinds of projections. Let’s consider the effect to date of the explosive growth in grain ethanol production. The difficulty in producing ethanol from cellulose is probably an order of magnitude greater than it is for producing ethanol from corn. Therefore, it is highly unlikely that the growth curve for cellulosic ethanol production (presuming it is ever commercially viable) will rival that of grain ethanol. So, let’s take a look at how gasoline consumption has evolved as we ramped up billions of gallons of ethanol production.

According to the Renewable Fuels Association’s Ethanol Industry Outlook 2007 (PDF warning):

As a result of the implementation of the Renewable Fuels Standard (RFS), increased octane demand and other market forces, the U.S. ethanol industry produced a record 4.9 billion gallons of ethanol from 110 biorefineries located in 19 states across the country in 2006. 2006 production exceeded the previous year’s production by a record one billion gallons, or more than 25%. Since 2000, ethanol production in the U.S. has increased more than 300%.

2006 was also a record year for construction, with no fewer than 15 new biorefineries coming online. The addition of these biorefineries, including the completion of expansion projects, added 1.051 billion gallons of new production capacity for the year. Additionally, 2006 closed with no fewer than 73 biorefineries under construction and 8 expanding that will add 6 billion gallons of new production capacity by 2009.

(Note to self: Corn futures to double again by 2009).

Ethanol production in 2000, again according to the Renewable Fuels Association’s page on industry statistics, was 1.63 billion gallons. According to their data, production in 2006 was 4.86 billion gallons, an increase of 3.23 billion gallons (77 million barrels). So, how much gasoline consumption have we displaced with this amazing growth in ethanol production? What have consumers and taxpayers gotten for their money?

According to the EIA, gasoline demand in 2000 averaged 8.4 million barrels per day. In 2006, gasoline demand averaged 9.3 million barrels per day. That is an increase in demand of 0.9 million barrels per day. This is 329 million barrels per year, or an overall demand increase of 13.8 BILLION GALLONS OF GASOLINE!

So, the next time someone tells you that ethanol production is going to reduce our fossil fuel usage, tell them that in the last 7 years annual ethanol production grew by 3 billion gallons, while annual gasoline demand grew by 14 billion gallons. This, despite steadily rising oil prices and record high gasoline prices. But, I would also point out that average annual rack ethanol prices have never – not once in 25 years – been lower than gasoline prices. And note this is a comparison versus 87 octane, which is always more expensive than the 85 octane that most people buy (85 octane has about an 80% market share).

Figure 1: 25 Years of Ethanol versus Gasoline. Source: Official Nebraska Government Website

I Am Still Not Convinced

A skeptic, eh? Good for you. Make me prove my point beyond reasonable doubt. That’s fair. I am sure you would agree that if the claims of ethanol proponents are true – that in fact ethanol is displacing some portion of our gasoline usage – the displacement should show up if we plot gasoline demand growth. What I would expect to see is that as ethanol production ramped up exponentially from about 2000, the gasoline demand curve should drop down below the historical trend. This would be fairly compelling evidence that something – which could be ethanol – is causing people to reduce gasoline consumption. Is that what we see? (Note: Gasoline production has been corrected for the contained ethanol in reformulated gasoline and E85. Thanks to various readers for bringing that up).


Figure 2: Ethanol’s Impact on Gas Consumption. Source: Me – using data from EIA and RFA

As you can see in the graph, until 2005 there is no variance from the gasoline demand growth curve as ethanol production ramped up. To argue that ethanol has had any mitigation on gasoline demand, a proponent has to resort to special pleading by suggesting that gasoline demand would have otherwise been stronger if ethanol production had not ramped up. In 2005 and 2006, we do see some slightly lower growth in gasoline demand, but the culprit there is almost certainly record high gasoline prices.

In 2005, Hurricane Katrina hit, followed by a fast run-up in gasoline prices. At the time, there were wide spread media reports of high prices lowering demand for gasoline. 2006 also saw gasoline prices hitting the $3 mark. Given that ethanol ramped up by 2 billion gallons from 1999 to 2004 with no apparent effect on the gasoline demand curve, it is unlikely that the 1.5 billion gallon increase in 2005 and 2006 is responsible for the small degree of variance.

So there you have it: Billions paid out in subsidies, food prices going up, farmland being used up at a faster pace, increased pollution from herbicide and pesticide runoff – and no apparent impact at all on our gasoline consumption. This is shaping up to be the largest boondoggle in U.S. history. But this analysis is exactly the reason I discount the recent reports that refiners might not expand because of the growth in mandated ethanol. I think this is merely a political shot at those who are demanding that the oil industry should spend billions to expand while also demanding that we reduce our gasoline consumption by 20%.

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May 27, 2007 - Posted by | ethanol, ethanol production, gasoline demand

26 Comments

  1. I’m no fan of corn ethanol and even less a fan of cherry picking. During your time frame gasoline demand grew above trend, then you threw seasonal effects into the mix with a January start point and May end point. Since oil first became an issue 35 years ago US gasoline demand growth has averaged a bit less than 1.5 billion gal/year. 6 billion additional gal/year of ethanol by 2009 is enough to cover all of trend line demand growth and might even be enough to reduce straight gasoline demand below current levels.I doubt all those ethanol plants will be built — the transport and blending infrastructure isn’t ramping fast enough. That’s why CBOT ethanol futures are now cheaper than gasoline (this may or may not contradict your three-month-old Omaha ‘rack rate’ data).Speaking of futures, if you really think corn will be $8/bu in 2009 untold riches await you on the commodities exchange. A few months salary invested in DEC09 options with a $6/bu strike would make you a millionaire.There’s also a semantic issue with the word “displace”. If someone who burned 1000 gallons of gas in 2006 and plans to burn 1020 gallons in 2007, instead burns 1010 gallons of gas and 15 gallons of ethanol, did the ethanol not “displace” 10 gallons of his gasoline demand? Your claim is actually that ethanol will not cause demand for straight gasoline to decrease over time. The claim may or may not prove true, but the discussion benefits from a clearer statement in either case.Refiners’ recent statements are somewhat humorous, basically reducing to “we are NOT holding back on refinery investment, and the reason we’re holding back is governments big ethanol push”. Kind of like when one of my four year olds says “I am NOT hitting him, and besides, he started it”. 🙂–doggydogworld

    Comment by Anonymous | May 27, 2007

  2. <>During your time frame gasoline demand grew above trend, then you threw seasonal effects into the mix with a January start point and May end point.<>No attempt to cherry pick, January is just when the RFA reports their numbers. But I agree that this is a low month for gasoline, and the last thing I want to do is to pick data that is subject to those kinds of questions. So, I am going to rework the numbers using annual data. The bottom line is the same: Those who say we are going to cut gasoline consumption by ramping up ethanol do not have history on their side.Cheers, RR

    Comment by Robert Rapier | May 27, 2007

  3. <>The claim may or may not prove true, but the discussion benefits from a clearer statement in either case.<>Modified the wording, and now have annual numbers in there for 2000 and 2006. The conclusion remains the same, but the article is more bullet-proof now thanks to your comments. (This is one of the things I like most about comments).Cheers, Robert

    Comment by Robert Rapier | May 27, 2007

  4. Robert said, <>But, I would also point out that average annual rack ethanol prices have never – not once in 25 years – been lower than gasoline prices.<>Robert,It’s also worth noting that the higher rack price for ethanol is despite the $0.51/gallon subsidy to fuel blenders.Without that subsidy and the tax credits to ethanol plants, plus the state and Federal mandates forcing consumers to buy ethanol-blended fuels, it’s doubtful that anyone would be in the corn ethanol business — except for distillers such as Jim Beam. 😉Recently there was an article in the Madison, WI newspaper quoting one of our local corn farmers as saying, “The price of diesel fuel and nitrogen fertilizer is killing us.”It’s curious that the corn ethanol industry remains in a state of denial when they refuse to understand their industry is totally dependent on the consumption of fossil fuels, and that without subsidies, mandates, tax credits, and protective tariffs, corn ethanol is a deadend. It’s also unfortunate that too few people in politics understand that corn ethanol is neither renewable nor sustainable.Cheers,Gary Dikkers

    Comment by Gary Dikkers | May 27, 2007

  5. “The 85 octane that most people buy? Here in California, 87 octane is the lowest offered. Are they lying and really selling us 85 octane?

    Comment by Anonymous | May 28, 2007

  6. <>Here in California, 87 octane is the lowest offered. Are they lying and really selling us 85 octane?<>It is probably like that in some other areas as well. But nationwide, far more 85 octane than 87 octane is sold. So it is a true statement that most people buy 85 octance.Cheers, Robert

    Comment by Robert Rapier | May 28, 2007

  7. <>Your claim is actually that ethanol will not cause demand for straight gasoline to decrease over time.<>I added a new section at the end. If that doesn’t demonstrate the point, I don’t know what does.Cheers, RR

    Comment by Robert Rapier | May 28, 2007

  8. I think the changes to the text make your case much clearer. Unfortunately the added section may contain a grevious error. Does your gasoline demand chart come from EIA “Finished Motor Gasoline Product Supplied” data? If so, note that those numbers include ethanol. Therefore a huge displacement of petroleum gasoline by ethanol would not cause the chart to flatten. In fact, the slope should actually steepen because the chart is based on volume.If you plot petroleum gasoline only the slope should flatten a little on the right half of your curve. The 2006 data point would be under the 140 billion mark. And if the RFA is right about 6 billion new gpy of ethanol by 2009, the curve would flatten considerably (perhaps even turn downward) the next couple of years.

    Comment by Anonymous | May 28, 2007

  9. <>Unfortunately the added section may contain a grevious error. Does your gasoline demand chart come from EIA “Finished Motor Gasoline Product Supplied” data?<>It comes from the gasoline demand, which they say comes from product supplied, which they define as:<>Approximately represents consumption of petroleum products because it measures the disappearance of these products from primary sources, i.e., refineries, natural gas processing plants, blending plants, pipelines, and bulk terminals. In general, product supplied of each product in any given period is computed as follows: field production, plus refinery production, plus imports, plus unaccounted for crude oil, (plus net receipts when calculated on a PAD District basis), minus stock change, minus crude oil losses, minus refinery inputs, minus exports.<>So their definition specifically states “petroleum products.” I have been poking about at the EIA site in search of a definite confirmation one way or the other, but haven’t found anything more definitive than they above. We need Doug Macyntyre to stop by and weigh in.

    Comment by Robert Rapier | May 28, 2007

  10. Their definitions page says:Finished motor gasoline includes all ethanol blended gasoline (e.g. E10, E85).http://tonto.eia.doe.gov/dnav/pet/TblDefs/pet_sum_sndw_tbldef2.aspI agree it’d be good to ask Doug.–doggydogworld

    Comment by Anonymous | May 28, 2007

  11. <>Finished motor gasoline includes all ethanol blended gasoline (e.g. E10, E85).<>But that’s not the definition they say they are using for demand. It may be, but a lot of their definitions are unclear (and seemingly contradictory). But in the definition that they say represents demand, they specifically say petroleum products.If that’s the case, I will modify that last section. It may be that there is some mitigation (in other words, ethanol would need to be backed out from the gasoline numbers) but the key point remains: Gasoline demand growth has been brisk – much faster than growth in ethanol production. So, the projections I have seen that show ethanol ramping skyward while gasoline curves down aren’t based on anything we have seen to date. I am thinking specifically of Vinod Khosla’s presentation where he shows exactly that.I will try to contact Doug Macyntyre tomorrow. I want to be sure this is right. In fact, I had this in the queue at The Oil Drum, but I have taken it back out until I know for sure on this issue. When it is resolved I will fix it if necessary and put it back in the queue. Incidentally, this essay was an offshoot of something I am working on for Financial Sense, so I am glad to get these things resolved before the bigger essay goes live there.Cheers, and thanks for the comments.Robert

    Comment by Robert Rapier | May 28, 2007

  12. I have modified the graph (not updated yet) and it looks almost identical if I pull out the ethanol from the gasoline demand. The gasoline demand curve is the same before and after ethanol ramped up. The only difference is that the last two points on the graph fall just slightly under the trend line. I will dig around some more, and if I can convince myself that finished motor gasoline is what they are using for demand, I will change it tomorrow when I get a chance.Cheers, Robert

    Comment by Robert Rapier | May 28, 2007

  13. We have moved to a new server. Within coming days we are going to refurbish the whole site that will provide an interactive platform. We appreciate your patience and apologize for inconvinience and disruption in service.your team at: http://www.ethanol-news.de

    Comment by Marian | May 29, 2007

  14. I eventually convinced myself that those demand numbers did contain ethanol. I did this by cross-checking production and demand numbers, along with imports. I had to add in ethanol to get the number they were giving for gasoline demand. I think their definition is no clear, and it ultimately doesn’t affect the conclusions, but thanks to all the readers who noted this (one by e-mail). It has now been corrected. This is a classic case of peer review via reader’s comments leading to a much stronger essay.Cheers, Robert

    Comment by Robert Rapier | May 29, 2007

  15. Finished RFG does include ethanol – we spent quite a bit of time trying to work that one out as well. RBOB is easier to work with, though you need to use the prime supplier sales volumes to get demand per se, and obv. RBOB isn’t on there but on the refinery outputs page, but it’s a good comparison to make sure your calculations make sense.BTW – rack gasoline has been trading at a premium to rack ethanol for most of May (according to the stats I can find – unfortunately our budget doesn’t stretch to OPIS) because of the refining downtime you’ve been highlighting. It’s a short-term distortion so it doesn’t undermine your overall point, but someone might call you on it.

    Comment by matt h2o | May 29, 2007

  16. <>It’s a short-term distortion so it doesn’t undermine your overall point, but someone might call you on it.<>Exactly why I put “annual” in there. In the short-term, there may be some issues that cause ethanol to briefly be cheaper. (Although at the Nebraska Government web site I quoted in the article, they are showing March ethanol at $2.31 and March gasoline at $2.02. But, there have been some brief times that ethanol was cheaper. But over a year’s time, the average has never been cheaper. Also, I would have to look, but even those few times that ethanol traded at a discount, I don’t think it traded at enough of a discount to offset the lower BTUs.Cheers, Robert

    Comment by Robert Rapier | May 29, 2007

  17. if you multiply the current NYMEX RBOB price by 0.7 and add 0.51 you get the NY Harbor ethanol price, give or take a couple of pennies…

    Comment by matt h2o | May 29, 2007

  18. <>So there you have it: Billions paid out in subsidies, food prices going up, farmland being used up at a faster pace, increased pollution from herbicide and pesticide runoff – and no apparent impact at all on our gasoline consumption. This is shaping up to be the largest boondoggle in U.S. history.<>Oh, but you leave out the best part: we also get higher food prices (corn and all food that eats corn). Plus for the 2007 season there is an understandable shift of more farmland to corn production. Some effects of this shift:1. Some of this land is not suitable for corn production (low annual rainfall, soil type, whatever). So the farmers are taking a huge risk. Lots of farmers could get burnt. Oh well, more subsidies, please!2. Corn needs more water and fertilizer than other crops. So, fertilizer gets more expensive.3. With less land available for wheat, soy and cotton, what do you think will happen to the prices of all of the above?But the cherry on the cake is the part that will bring all the madness to an end: soon corn prices will be so high, no ethanol refiner will be able to show a profit (in spite of all those subsidies and tariffs). What follows next will be ugly. Early warning to Big Oil: you guys will get the blame for the failed ethanol industry, of course.

    Comment by Optimist | May 29, 2007

  19. I saw the original NY Times article citing biofuels mandates and future energy policies as a reason not to invest in additional US refining capacity. After thinking about it a bit I called it Barbra Streisand. High capital costs and long lead times for permitting and construction are the most likely culprits. I never make the argument that “We haven’t built a new refinery in 30 years.” it is bogus. While technically true, the industry has added the equivalent capacity of many new refineries. Most of the majors are buying back their own stocks. The reason is clear. Depending on the company and stock price, the CEO can make 3-5% risk free and tax free by repurchasing shares. That is probably more than the 20 year historic return on refinery assets.

    Comment by KingofKaty | May 29, 2007

  20. Add a 2007 estimate to your graph and the flattening will be very noticeable. I estimate 2007 Finished Motor Gasoline will grow +2.4 billion gallons based on the 1.7% YTD growth rate. I estimate 1.6 b gal of this growth will come from ethanol, based on 27% YTD growth rate and a look at RFA’s installed and planned plant capacity data. That leaves 0.8 b gal growth in petro gasoline.If your 2006 data point is 137.5 b gal that puts 2007 at 138.3. Do a straight-line fit of the 1991-2001 data (before ethanol took off) and extend that straight line to 2007. I think the actual data will vary dramatically from the extrapolated straight line. Alternatively you could do a 2nd order curve fit, which should show a noticeable flattening as ethanol took off the last few years.I know I’m harping on this one point a lot, but I think it’s important. It’s true that looking backward ethanol has barely dented growth in gasoline demand. But looking forward I think it’s a different story. At least for a few years — 2010 and beyond depends on cellulosic.–doggydogworld

    Comment by Anonymous | May 30, 2007

  21. <>At least for a few years — 2010 and beyond depends on cellulosic.<>Yes, why not trust technologies that have yet to be invented? You can use the cellulosic ethanol in your Chevy Volt, and go for a drive to the North Pole, to have tea with Santa Claus and the Tooth Fairy.Meanwhile, back in the real world, < HREF="http://washingtontimes.com/commentary/20070529-085331-8649r.htm" REL="nofollow">ethanol is already beginning to implode<>. < HREF="http://www.abc2news.com/content/dwym/story.aspx?content_id=37079a27-0ea6-463a-8c5d-406696b518c7" REL="nofollow">What, it has less energy too?<>

    Comment by Optimist | May 30, 2007

  22. <>You can use the cellulosic ethanol in your Chevy Volt, and go for a drive to the North Pole, to have tea with Santa Claus and the Tooth Fairy.<>That sounds exactly like something Homer Simpson would say.

    Comment by Robert Rapier | May 30, 2007

  23. <>That sounds exactly like something Homer Simpson would say.<>D’oh!

    Comment by Optimist | May 30, 2007

  24. Shouldn’t this 2000-2006 analysis also contemplate the fact that MTBE supply went from multi-billion gallons to zero???? A large part of ethanol’s growth over this time period would solely be attributable to oxygenate replacement, NOT gasoline per se.

    Comment by Anonymous | June 5, 2007

  25. <>Shouldn’t this 2000-2006 analysis also contemplate the fact that MTBE supply went from multi-billion gallons to zero????<>That would have been a blip in the first half of 2006. The MTBE supply was phased out very quickly, so it would not explain the graph. The graph shows a consistent ramping up of ethanol capacity, with no effect on gasoline demand growth.

    Comment by Robert Rapier | June 6, 2007

  26. Incredibly stupid article. The only issue with ethanol is that the oil companies are actively trying to maintain their monopoly on the market. They won’t let e85 pumps be installed in their stations. They refuse to blend the product any more than they have to. They are trying to kill the industry. That is why the government needs to force the oil companies to use the product. I care much less anout oil company profits than I do about fighting for oil in the Middle East.The problem ethanol faces has zero to do with consumers, corn prices (which are up far less than most other commodities), or invented problems with using ethanol.

    Comment by Anonymous | October 11, 2007


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