R-Squared Energy Blog

Pure Energy

How Much Natural Gas to Replace Gasoline?

I Took This Picture of a CNG Bus on a Recent Trip to D.C.

You may have seen the news this week that a report by the Potential Gas Committee says natural gas reserves in 2008 rose to 2,074 trillion cubic feet. The New York Times and the Wall Street Journal (via Rigzone) both had stories on it, and T. Boone Pickens issued a press release. First, from the New York Times (and this is a really good article):

Estimate Places Natural Gas Reserves 35% Higher

Thanks to new drilling technologies that are unlocking substantial amounts of natural gas from shale rocks, the nation’s estimated gas reserves have surged by 35 percent, according to a study due for release on Thursday.

Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves.

The new estimates show “an exceptionally strong and optimistic gas supply picture for the nation,” according to a summary of the report, which is issued every two years by a group of academics and industry experts that is supported by the Colorado School of Mines.

The Wall Street Journal wrote:

US Has Almost 100-Year Supply of Natural Gas

The amount of natural gas available for production in the United States has soared 58% in the past four years, driven by a drilling boom and the discovery of huge new gas fields in Texas, Louisiana and Pennsylvania, a new study says.

…the Potential Gas Committee’s study was prepared by industry geologists who analyzed individual gas fields using seismic imagery and production data provided by gas producers. The surge in gas resources is the result of a five-year-long drilling boom spurred by high natural-gas prices, easy credit and new technologies that allowed companies to produce gas from a dense kind of rock known as shale. The first big shale formation to be discovered, the Barnett Shale near Fort Worth, Texas, is now the country’s top-producing gas field, and companies have made other huge discoveries in Arkansas, Louisiana and Pennsylvania. Together, the shale fields account for roughly a third of U.S. gas resources, according to the Potential Gas Committee.

Pickens had this to say:

T. Boone Pickens Statement on Surge in Estimated Natural Gas Reserves

Today’s report substantiates what I’ve been saying for years: there’s plenty of natural gas in the U.S. I launched the Pickens Plan a year ago to help reduce our dangerous dependence on foreign oil, and using our abundant supply of natural gas as a transition fuel for fleet vehicles and heavy-duty trucks is a key element of that plan. On the same day this report is going out, diesel prices are again on the rise, squeezing the trucking industry. Now more than ever we need to take action to enact energy reform that will immediately reduce oil imports.

The 2,074 trillion cubic feet of domestic natural gas reserves cited in the study is the equivalent of nearly 350 billion barrels of oil, about the same as Saudi Arabia’s oil reserves.

A number of people have rightly pointed out that a 100-year supply implies usage at current rates. But it got me to thinking about how much natural gas it would take to displace all U.S. gasoline consumption. So in the spirit of my previous essay Replacing Gasoline with Solar Power, I will do the same calculation for replacing gasoline with natural gas. The big difference between this calculation and the earlier one is that solar power still has some technical issues to resolve (e.g., storage) and electric vehicles are not yet ready for prime time. On the other hand we are perfectly capable, today, of displacing large numbers of gasoline-fueled vehicles with natural gas.

How Much Do We Need?

The U.S. currently consumes 390 million gallons of gasoline per day. (Source: EIA). A gallon of gasoline contains about 115,000 BTUs. (Source: EPA). The energy content of this much gasoline is equivalent to 45 trillion BTUs per day. The energy content of natural gas is about 1,000 BTUs per standard cubic foot (scf). Therefore, to replace all gasoline consumption would require 45 billion scf per day, or 16.4 trillion scf per year. Current U.S. natural gas consumption is 23 trillion scf per year (Source: EIA). Therefore, replacing all gasoline consumption with natural gas would require a total usage of 39.4 trillion scf per year, an increase in natural gas consumption of 71% over present usage.

Assuming for the sake of argument that the 2,074 trillion standard cubic feet cited in the study is accurate, that the “probable, possible and speculative reserves” eventually equate to actual reserves, and that the gas is economically recoverable, that is enough gas for 53 years of combined current natural gas consumption and gasoline consumption. If you assume that only the proven plus probable reserves are eventually recovered, the amount drops to about 1/3rd of the 2,074 trillion scf estimate, still enough to satisfy current natural gas consumption and replace all gasoline consumption for almost 20 years.

We can also calculate in terms of oil imports. Right now the U.S. imports about 13 million barrels per day of all petroleum products. A barrel of oil contains around 5.8 million BTUs, but oil only makes up 10 million of the 13 million barrel per day figure. Other imports include things like gasoline (4.8 million BTUs/bbl) and ethanol (3.2 million BTUs/bbl). Scanning the list of imports, I probably won’t be too far off the mark to presume that the average BTU value of those 13 million bpd of imports is about 5.4 million BTUs/bbl. On an annual basis, this equates to 25.6 trillion scf of natural gas, which would be an increase over current natural gas usage of 111%. Going back to the 2,074 trillion scf from the study, this would be enough to displace imports of all petroleum products (again, at current usage rates and not factoring in declining U.S. oil production) for 43 years.

What’s the Cost?

Natural gas is presently trading at about $4 per million (MM) BTU (although December 2009 is trading at almost $6). Oil is presently trading at $71/bbl, which equates to $12.24/MMBTU. Gasoline is presently trading at over $17/MMBTU. Thus, natural gas is a bargain relative to oil or gasoline. Incidentally, I just checked on seasoned wood and wood pellets, and they range from $8-$12/MMBTUs. So it is cheaper to heat your house with gas than with wood. I am not sure I would have guessed that.

While natural gas is a bargain relative to gasoline, converting a gasoline-powered vehicle to natural gas isn’t cheap. According to this source, it can cost $12,500 to $22,500 to convert a gasoline-powered car to natural gas. Honda makes a compressed natural gas (CNG) vehicle, but according to this review in Car and Driver the premium over the gasoline version is $8780. A person would need to drive an awful lot to justify that premium. However, that’s what fleets do. They drive a lot. The large price differential explains why fleets would be interested in running their vehicles on natural gas.

Conclusions

So, the good news is that the United States could be energy independent if the newly released natural gas reserve numbers are remotely accurate. It also appears that we have enough natural gas available that civilization isn’t going to end any time soon due to lack of energy supplies. There are three caveats. First, energy independence via natural gas could require us to spend significantly more for personal automotive transportation. Second, “possible” reserves may never materialize. Finally, a large chunk of the calculated reserves are based on shale gas, and that requires gas to be in the $6-$8/million BTU range to be economical. Still, it is a bargain compared to gasoline, and it explains why fleets are more receptive to conversion to natural gas than the general public is likely to be for their personal vehicles.

June 19, 2009 Posted by | CNG, energy consumption, gasoline, gasoline demand, gasoline imports, natural gas, oil consumption, oil imports, T. Boone Pickens | 63 Comments

Haven’t We Seen This Before?

At this year’s ASPO conference, I was twice asked about the gasoline supply situation – once at a panel session and once by a reporter. At the time, there were gas shortages throughout the southeast, and some of the speakers gave the impression that this was the beginning of the end: Gas shortages are here to stay, and we are on the verge of the entire country running out of gasoline. There were a number of predictions along the lines of “It’s going to get a lot worse before it gets better.”

While first discussing the source of the gas shortages – low inventories followed by a hurricane that sidelined a significant source of refining capacity – I answered the question as follows: “This is a temporary event. We will see imports start to pick up and fill the shortfall. We will see refining capacity start to come back online, and I predict that a month from now gasoline inventories will be higher than they are today.”

Of course that doesn’t mean that we won’t find ourselves right back in this position, nor that it won’t be worse next time. But I think failure to understand how the refinery/pipeline/import system works – sometimes by people in positions of authority – can cause premature predictions of imminent disaster. I think we have far too many people who can’t identify a wolf telling the villagers that the wolf is here. Many know that this is a pet peeve of mine.

So what has happened since ASPO? The ASPO conference took place 4 weeks ago. At the time, gasoline inventories stood at 178.7 million barrels. Imports at that time were at 1.2 million barrels a day. Since then, we have seen 3 consecutive weeks of inventory build, and inventories now stand at 193.8 million barrels, just 2 million barrels short of their position of a year ago. Why have inventories built? Three reasons. Imports, as I predicted, picked up and have been above the 1.2 million barrel level in each of the past 3 weeks. Demand remains historically low due to high prices. And refinery utilization has increased in each of the past 3 weeks.

However, there was one thing I didn’t predict, and that is the primary topic of this essay. If someone had asked me, I would have guessed that because of the inventory situation, gasoline prices would remain strong. That hasn’t happened. (I think the anti-gouging laws worked to keep prices in check, at the expense of worsening the shortages. See Rationing by Running Out).

As inventories have recovered, gasoline prices have plummented. Retail gasoline prices have fallen each of the past 3 weeks, and are now down by $0.50 since the conference. This is of course being driven by the collapse of oil prices, but doesn’t bode well for spring gasoline prices. Why? It seems that we have been here before.

In August of 2006, retail gasoline prices briefly touched $3.00/gal. Prices then plummented by more than $0.70/gal, and spent the late fall/early winter in the $2.20/gal range. The sudden arrival of lower prices had two primary impacts. First, imports dried up, as it wasn’t nearly as financially attractive for exporters to send gasoline to the U.S. Second, demand picked up sharply, eventually reaching winter levels of 9.5 million barrels/day – unprecedented for that time of year. As one might expect, this resulted in a steep decline in gasoline inventories, and we went into the spring of 2007 with historically low inventories.

I devoted a lot of time in the first half of 2007 toward discussing the plunging inventory situation – and predicted much higher gasoline prices as a result. In mid-April, I even got into a debate with Doug MacIntyre, who at that time was the author of This Week in Petroleum, about the direction of gasoline prices. He felt like prices were peaking in April of 2007, I thought they still had room to run. In fact gasoline prices ran up another $0.33/gal in the six weeks following our discussion, setting a national retail gasoline price record at that time of $3.26/gal.

So now we return to the fall of 2008. Because of record gasoline prices, demand this year has been much lower than last year. At times this year, gasoline demand has been half a million barrels a day lower than at this time last year (or in 2006). But gasoline prices – currently still much higher than in 2006 or 2007 – are on a downward trajectory that is certain to result in an increase in demand. In fact, demand last week reversed course and trended higher for the first time since late August. If prices continue to fall, keep a close eye on demand, imports, and ultimately inventories. This is all setting up to be similar to the situation we saw of much lower prices in late 2006, which led to record gasoline prices by the summer of 2007.

This all highlights the fact that we are playing with fire with our gasoline inventories. It was no surprise to inventory watchers that parts of the country quickly ran out of gasoline following Hurricane Ike. This is the risk we run when we maintain gasoline inventories at a low level: Events that disrupt gasoline supplies can very quickly cause havoc. The solution to the problem isn’t easy. Refiners have seen margins evaporate, and thus don’t want to maintain high inventories. A strategic gasoline reserve would seem to be an answer, but it would be difficult to maintain because of the seasonal variations in gasoline blends. The shelf life just wouldn’t be long enough.

So while I expect this trend of shortages to continue, you can give yourself an advantage by being educated about the inventory situation – especially in your particular part of the country. That won’t prevent entire cities from running short of gasoline in the event of a disruption, but it can prevent you personally from being one of the masses of people waiting in gasoline lines, wondering exactly what went wrong.

October 19, 2008 Posted by | EIA, gas inventories, gas prices, gas shortages, gasoline demand, twip | 627 Comments

More Signs of Demand Destruction

This time, the news comes from the API:

U.S. oil demand drops in first half of 2008

WASHINGTON – U.S. oil demand was significantly down for the first six months of 2008, API said today in its Monthly Statistical Report. While U.S. refiners churned out record and near-record amounts of oil products, imports – especially product imports — fell substantially.

Deliveries of all oil products – a measure of demand – fell 3.0 percent compared with the same first-half-year period in 2007, with gasoline deliveries slipping 1.7 percent. For the preceding three years, oil demand had essentially held steady.

API statistics manager Ron Planting said, “At 20.08 million barrels per day, total demand was the lowest in five years. And the decline in gasoline demand was the first significant one recorded in 17 years. Higher pump prices and a slowing economy were undoubtedly factors.”

Those are significant numbers. This should not be lost on those who think we should tap the SPR to push prices back down.

July 19, 2008 Posted by | American Petroleum Institute, api, gasoline demand, oil demand | 21 Comments

API Year End Statistics

The API has released their year end report on consumption, and some of the results were quite interesting. They held a blogger call today to discuss the results, but I got tied up and couldn’t make it. If they post a transcript, I will check it out and may excerpt some portions.

The summary of the statistical report may be found here, and the press release discussing the report is here. But here is the press release in full:

U.S. fuel production at record-high in 2007, demand flat – API

WASHINGTON – U.S. fuel production reached a record high in 2007 as refinery capacity expanded for the 11th straight year, API data show. U.S. crude oil production also rose in 2007, the first annual increase since 1991, according to API’s year-end Monthly Statistical Report.

The API statistics also showed that U.S. oil demand was flat in 2007, the third straight year of stagnant or lower oil demand in the world’s largest oil-consuming nation.

“While much of the increase in crude oil production represents a recovery from 2006’s depressed levels, our latest drilling figures show tremendous industry efforts to develop additional supplies from those regions that are open to exploration.,” said Ron Planting, manager, information and analysis, for API.

Given the higher domestic production and flat demand, total oil imports fell 1.9 percent from year-ago levels, though imports still cover about 65 percent of U.S. oil demand.

“Despite high oil prices, the industry worked hard to meet the needs of consumers by producing record amounts of fuel,” said API Chief Economist John Felmy. “Consumers appear to be responding to the higher prices at the margin.”

Total U.S. petroleum deliveries, a proxy for demand, averaged 20.7 million barrels per day, the same level seen in 2006, following a decline of 0.6 percent in that year. In the fourth quarter alone, deliveries slumped 0.4 percent.

Despite a one percent year-on-year increase in the first quarter, gasoline demand was lagging about half a percent below 2006 levels by the fourth quarter. On the other hand, distillate fuel oil demand rose 1.5 percent in the year amid rising diesel demand and higher home heating demand.

The demand data includes an increase in the amount of ethanol blended into gasoline, which averaged more than 400,000 barrels per day. Excluding ethanol, which accounted for nearly five percent of all gasoline sales during the year, total domestic oil deliveries in 2007 actually fell half a percent. An estimated 6.7 billon gallons of fuel ethanol were used by refiners in 2007, some two billion gallons more than the 4.7 billion gallons required by law but more than two billion gallons less than the recently-passed requirement for 2008.

So, three years in a row of stagnant oil demand. Is that because production has been flat, or have high prices caused demand to stay flat? Gasoline demand also reportedly fell, which would (I believe) be the first decline in quite some time. Are higher prices responsible, or is ethanol primarily responsible? Increased ethanol production is certain to be putting some pressure on natural gas prices; besides corn farmers, natural gas producers benefit from the ethanol mandates.

And does our government really think we should bump up the 2008 usage of ethanol to 9 billion gallons? (Yes, they do). Egads, I am going to plant some corn and get rich quick.

January 17, 2008 Posted by | American Petroleum Institute, gasoline demand, oil production | 112 Comments

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%.

May 27, 2007 Posted by | ethanol, ethanol production, gasoline demand | 58 Comments

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%.

May 27, 2007 Posted by | ethanol, ethanol production, gasoline demand | Comments Off on The Mythical Ethanol Threat

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%.

May 27, 2007 Posted by | ethanol, ethanol production, gasoline demand | 26 Comments