Don’t Blame the Fuel Ethanol Industry for High Domestic Fuel Prices

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Researched by Industrial Info Resources (Sugar Land, Texas). As gasoline retailers buy new numbers to post out-front of their stations to show how much gasoline will cost today, don’t blame the fuel ethanol industry for the abundance of “3’s” posted on the sign. The domestic fuel ethanol industry continues to break monthly production records, filling the ethanol “virtual pipeline” with product daily destined for delivery to parts of the country requiring reformulated gasoline.

New numbers released by the U.S. Energy Information Administration (EIA) show ethanol production is at its highest level ever, producing over 300,000 barrels per day in February 2006, and representing a 14,000 barrel per day increase over the prior month.

Bob Dinneen, President of the Renewable Fuels Association states, “With dramatic increases in both production and stock supplies, as well as increased imports, it is abundantly clear that ethanol supplies will be more than adequate to meet the surging demand created by gasoline refiners’ decision to eliminate MTBE. The U.S. ethanol industry has the supply and the know-how to get ethanol to the markets that need it when they need it.”

To understand what is happening in the fuel market, one must first understand how gasoline inventories work and where and how ethanol is blended in the fuel system. All gasoline inventories are not tracked during the transition from Methyl Tertiary Butyl Ether (MTBE) reformulated gasoline (RFG) to ethanol RFG, since ethanol is not blended into the fuel delivery system until just before the tanker leaves the distribution terminals to retailers skewing the real inventory number. And some terminals are still getting rid of their winter-grade gasoline to make way for the summer-grade gasoline that will be bended with ethanol.

According to the EIA, Reformulated Blendstock for Oxygenate Blending (RBOB) that is intended to be blended with MTBE is listed as RBOB or finished RFG, while RBOB that is intended to be blended with ethanol is listed as RBOB with alcohol. Many analysts have been watching the changes in finished RFG and RBOB with alcohol stock levels. With much of the East Coast (and parts of Texas) converting from using MTBE RFG to ethanol RFG, there has been a shift taking place between finished RFG and RBOB with alcohol. Finished RFG levels are some 20% below RBOB with alcohol. Terminals have been reducing their inventories of finished RFG, which is most likely winter grade gasoline, in order to make room for RBOB with alcohol. As the anticipated phase-out of MTBE progresses, finished RFG inventories are expected to virtually disappear.

Another factor is some distribution terminals are not yet retrofitted to handle and blend ethanol at the terminal level. Mary Rose Brown, a spokesperson for Valero in Houston stated, “It isn’t a true gasoline scarcity, it’s just a logistic nightmare. You’ve got to retrofit the terminals to be able to add the ethanol, so a lot of times you’ll have several bays shut down leading to delays.” She expects inventory levels and delays to return to normal by the end of the week

The fuel ethanol industry has been preparing for this moment for over five years and domestic ethanol production capacity will continue to grow as new players inter the market on a monthly basis. Currently there are over 120 ethanol plants in operation that have a combined production capacity of nearly 4.5 billion gallons a year. 35 new ethanol plants and nine expansions are currently under construction that will add a combined annual capacity of more than 2.2 billion gallons over the next 12 to 18 months and another 200 plants are scheduled to be built over the next three years.

Industrial Info's Ethanol Production Database provides a comprehensive outline of all current development activities in the emerging synthetic fuels market. This database covers 123 ethanol plants currently in operation and 234 plants under development. It also covers 17 operational biodiesel plants and 40 biodiesel plants under development.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.