George C. Marshall Institute’s Washington Roundtable: Cellulosic Ethanol
Larry KuminsExecutive Vice President
Energy Policy Research Foundation Inc.
National Press ClubWashington, DC
July 25, 2007
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EPRINC
Energy Policy Research Foundation Inc. (EPRINC): successor organization to the Petroleum Industry Research Foundation Inc. (PIRINC) PIRINC was founded in 1944 in NYC Re-imagined in DC in 2007 as EPRINC President: Lou Pugliaresi
Executive Vice President: Larry Kumins EPRINC brings policy analysis and industry
economics to bear on current energy issues
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Agenda
Part I: Ethanol – Background and Current Landscape
Part II: Ethanol Consumption and Pricing
Part III: Gasoline Pool and Vehicle Fleets
Part IV: Investment
Part V: Energy Security Issue Items
Q & A
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Establishing the Landscape Rapid run up in Ethanol Consumption through
2006 was a One Time Event Potential growth is currently 2/3 realized Future growth will be predicated on ethanol’s
ability to replace gasoline as a primary fuel
Gasoline replacement by ethanol is constrained by two factors:
The gasoline/ethanol distribution infrastructure does not provide universal supply
Physical limitations of vehicles’ ethanol usage
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Ethanol Background
Used as a high octane motor fuel since internal combustion invented
Energy Tax Act of ’78 started the federal tax exemption 4 cents/gal “gasohol”
American Jobs Creation Act of 2004—51 cents per gal for ethanol blended
EPAct 05 mandates—4.0 bil gals in 2006; 7.5 bil gal in 2012
Current Consumption exceeds 6 bil gal annually
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2006--Ethanol Becomes an Important Motor Fuel Component
Ethanol consumption increases form 2.1 bil gal to 5.4 bil gal 2002-2006
MTBE was a blending component of choice, adding oxygen content and boosting octane
MTBE Phase-out: In process since 2000 Consumption peaked at about 300,000 b/d Zeroed-out in 2006
Ethanol Phase-In: ~400,000 b/d ethanol to replace MTBE Essential and complimentary to making gasoline
* Octane and O2* Adds barrels to gasoline supply
BUT, Ethanol is only a replacement for MTBE
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Ethanol and MTBE Consumption 2002-2006
0
50
100
150
200
250
300
350
400
2002 2003 2004 2005 2006
000/ b/d
EthanolMTBE
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Ethanol Prices are Falling v. Gasoline
Note the following:
Ethanol price spike as MTBE exits the gasoline pool
Convergence in gallon prices; ethanol becomes cheaper than gasoline
Ethanol prices decline as capacity and imports arrive in fuel markets
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U.S. Ethanol Plant Capacity Grows
119 operating plants; capacity is 6.2 bil gal/yr—400,000 b/d
86 plants under construction; capacity 6.4 bil gal/yr—420,000 b/d
US will have over 800,000 b/d of corn ethanol capacity—exceeds EPAct05 2012 mandate
May exceed the amount of consumption physically possible
Will a glut result? Will ethanol prices—and plant economics---collapse?
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Corn prices have doubled. They fell in early 2007, but future contracts for out months suggest return to $4+
Plants are buying more corn, driving corn prices up
Plants increase the supply of ethanol; prices drop
Implication: - High corn demand and ethanol oversupply?
- Commensurate price effects?
Corn Prices are Rising Relative to Ethanol Prices; Ethanol Profitability Declining
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Farmers Respond to High Corn Prices - 2007
Record Corn Plantings - Highest Since 1944 Corn acreage increased 15%
Using land from: Cotton—acreage down 20% Soybeans—acreage down 11%
Price Implications Near month corn prices fell ~$0.50 per bu on planting report release, but
Price outlook for 2008 remains $4+
Cotton and soybean prices will rise because of smaller plantings
Source: USDA, Prospective Plantings. Mar.2007
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Ethanol is NOT Oil
Volume vs. Energy Content: Btu content is only 2/3rds gasoline
Volumes do not hold comparable energy value; current $1.90/gal ethanol price is the energy equivalent of $2.84 gasoline
Physical issues: Mix tends to separate; attract water. Can’t be shipped by pipeline
Expensive transport: 75% by rail; 25% truck; oil moves by pipeline at 1/4th cost
Mixture has short shelf-life: blended locally Gallons vs. Barrels: Ethanol industry measures in
gallons per year; petroleum in barrels per day. Optics of large numbers.
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Auto fleet designed to use 10% ethanol; it can’t use more Ethanol transport constraints prevent universal distribution
Not all gasoline blenders can get ethanol Less than 100% mogas can be E-10
If higher blends are to be consumed, more E-85 (FFVs) needed in fleet
E-85 vehicles have sold poorly: Out of 237 million vehicles on the road, only 6 million are FFVs Detroit makers pledged half 2012 output will be FFVs; foreign makers not
showing interest In 2017, 280 million vehicles on the road: How many will be FFVs?
Vehicle Fleet Will Slow Ethanol Uptake
Implication: if Detroit succeeds, only 25% of new vehicles sold will be FFVs
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Recap: Role of Ethanol in the Gasoline Pool
% Ethanol
Billions Gallons/
Year
B/D (000)
Fundamental Factor Price Implication
~ %5 ~8 500 Necessary- Complimentary—The current situation; replacing MTBE
Higher than Gasoline
5% - 8% ~12 750 Enhancing Gasoline Performance and Increasing supply Volumes
Converging on Gasoline Price
10% ~15 1,000
Max % current vehicles can use
Limited by Distribution Infrastructure
Price Competition
among Ethanol Producers
Much greater
than 10%35 2,300 Exceeds likely Auto Fleet
Capability
Market Oversupplied—Serious Price
Erosion
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Cellulosic Ethanol in the Gasoline Pool
Must transition from lab to commercial activity Supplement corn-ethanol to minimize:
Crop cycle risk Agricultural consumer vs. energy consumer
conflict Mitigate inflationary impact of ethanol on
Agricultural commodities Provided needed fuel components
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Continued….
Consumption will not exceed >10% of gasoline pool without substantial changes in the stock of capital
Pipeline transport & terminal facilities Retail facilities Universal distribution across the country Automobiles capable of using 10% plus blends
Investors have been quick to back ethanol production, but infrastructure has attracted little interest
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Investment: Ethanol Plant vs. Oil Refining
Refining---2003-2006 Refining capacity grew by 0.6 mbd Imports of refined oil product grew by 1.0 mbd U.S. refining capacity continues to lag consumption growth Results in very high refinery utilization w/o capability to deal with outages,
scheduled maintenance, etc. Current gasoline price situation--$2.15 in January; $3.25 in June--due to
refinery outages Challenged refinery capacity has become its own energy security issue
Ethanol and oil compete for capital and for the same materials and services
Ethanol may be crowding out investment in petroleum refining These factors taken together with the threat of additional ethanol
mandates have had a chilling impact of refinery investment
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Energy Security Goals: Minimizing Risk
Control Growth/Reduce Petroleum Imports Buffer Economy from Price Shocks Caused
By Adverse World Market Events Encourage U.S. Refinery Capacity Catch-up
With Consumption Reduce risk from refinery mishaps
BUT Depending on An Agricultural Commodity For Energy Supply Introduces New Risks Associated with Crop Cycle
Implication: Important Role for Cellulosic Ethanol
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Thank you
Q & A
Lawrence Kumins Executive Vice President Energy Policy Research Foundation Inc.
