The Ethanol Market: Facing Challenges and Opportunities

by Hyunok Lee, Agricultural Economist, and Roger Conway, Director, Office of Energy, USDA, Washington, DC.

President George Bush has issued a challenge to America. On November 15, 1990, President Bush signed the Clean Air Act (CAA) of 1990 the first clean air bill in 13 years. This act targeted automobile fuel emissions as a major source of air pollution. The act mandates the use of cleaner burning fuels in problem areas to improve the Nation's mobile-source air pollution. Ethanol is one such fuel. Ethanol can help us reach our urban air-quality goals by reducing automobile emissions, the primary cause of air pollution in the United States.

Besides helping to achieve the Nation's goal of cleaner air, ethanol can also help create new value-added markets for our farmers, while it enhances our Nation's energy security with domestically produced, renewable fuels.

Ethanol's Evolving Role

Once considered a simple fuel extender, the role of fuel ethanol has evolved, first to an octane enhancer and then to an oxygen provider. As a gasoline extender, fuel ethanol had little market impact given ethanol's small market share in the U.S. fuel market. As ethanol's octane value was recognized, the resulting economic effects of ethanol were seen to be more positive. However, ethanol has played only a minor role in the octane market since other means both economical and preferred by refiners were available to boost the octane level. Such a market role for ethanol, however, changed with the passage of the Clean Air Act. The oxygen requirements mandated by the CAA spurred a market for oxygenates and ethanol's oxygenate value added a new dimension to the ethanol market. To fully appreciate the economics of ethanol, it is important to understand how ethanol's role has evolved over time in the U.S. transportation fuel economy.

Gasoline Extender/Octane Enhancer. From the turn of the century, both pure ethanol and ethanol blended gasolines were used on a limited basis for automobiles in the United States. The real impetus for commercialization came in the 1970's as a result of the oil embargoes of 1973 and 1979.

Fuel ethanol was then considered a means of extending the Nation's gasoline supply and aiding U.S. energy security. To provide economic incentives to ethanol producers, the Federal and State governments initiated support under tax incentives and loan programs. Those initial government programs played a positive role in the commercial development of ethanol as a gasoline extender.

Other types of government actions (mostly regulatory, environmental policies) also greatly influenced the ethanol industry. While the old concerns about energy security not only remained but also increased, new problems emerged in the arena of public health and the environment. In the late 1970's, the Environmental Protection Agency (EPA) initiated a public program to remove lead that was added to gasoline to boost the octane level. Ethanol, with its high-octane property, soon established its role as an octane enhancer. Blending ethanol at 10 percent (EIO) raises the gasoline's octane level by an average of three octane points (table 1).

As an octane enhancer, ethanol had to compete with other octane enhancers. In the early 1980's, methanol blends gained a short popularity but soon disappeared from the market due to public health risks associated with methanol's toxicity as well as to its undesirable corrosive effects on engines and pipelines. While methanol blends did not experience a wide market success, a methanol-derived ether called methyl tertiary butyl ether (MTBE), also used to raise octane content, became popular as a blending agent. MTBE, first produced in 1979 in the United States and Europe, was developed primarily as an octane enhancer by combining isobutylene and methanol. Unlike ethanol, MTBE can easily be blended with gasoline at the refinery and transported by pipeline.

Ethanol as an Oxygenate

In recent years, interest in ethanol has centered around its oxygenate use to attain urban air-quality goals through the reduction of automobile fuel emissions. The key chemical factor that differentiates ethanol from gasoline is the presence of oxygen in ethanol and its absence in typical hydrocarbon gasoline. The 1990 CAA calls for the use of oxygenated fuels in the oxygenated fuels program to control carbon monoxide problems and also as part of the reformulated gasoline program to control ozone problems. Refiners and blenders must use oxygenates, including ethanol, ethyl tertiary butyl ether (ETBE), MTBE, or tertiary amyl methyl ether (TAME), to meet the regulations.

Two titles of the Clean Air Act pertain to mobile-source air pollution. Title I defines standards for non-attainment areas where air-quality goals are not met and calls for specific actions to reduce air pollution in those areas. Title II mandates the sale of oxygenated gasoline in carbon monoxide nonattainment areas, and it also mandates the sale of reformulated gasoline in ozone nonattainment areas as defined in Title I. Ethanol has a role in both.

Carbon Monoxide Control. Carbon monoxide in an urban atmosphere comes primarily from the exhaust emissions of internal combustion engines. However, the presence of oxygen in the fuel raises the effective air-to-fuel ratio for combustion and reduces carbon monoxide (CO) emissions.

Thirty-nine of the Nation's urban areas are designated as either moderate or serious CO nonattainment areas. Approximately 21 percent of the U.S population is estimated to live in these CO nonattainment areas. The CAA mandates the oxygenated fuels program in these areas, and requires a minimum oxygen content in fuel of 2.7 percent by weight for a period of no less than 4 winter months, beginning no later than November 1, 1992. In some of the worst CO problem areas, such as Denver, Phoenix, and Tucson, oxygenated fuel use has already been required during the winter.

Most fuel oxygenates are derived from nonrenewable sources. The most widely used oxygenate in the market today is the methanol-derived ether, MTBE. Methanol is made mostly from natural gas and is converted into an ether by chemically combining, it with a tertiary olefin, such as isobutylene or isoamylene, which respectively produce MTBE and TAME. TAME is not currently produced but it may have a future in the oxygenate market.

Ethanol contains a higher oxygen content than MTBE: ethanol has a 35-percent oxygen content by weight while MTBE has an 18-percent oxygen content by weight (table 1). In terms of the oxygen content, 1 gallon of ethanol is equivalent to 1.95 gallons of MTBE. To achieve a fuel with 2.7 percent oxygen would require a 15-percent blend for MTBE and a 7.7-percent blend for ethanol.

Ground-level Ozone Control. Almost half of the total U.S. population lives in ozone nonattainment areas. Ozone pollution not only causes a number of human health problems, but it may also contribute to global warming as a greenhouse gas. Urban ozone is generated from ultraviolet light acting on local concentrations of volatile organic compounds (VOC's), CO, and nitrogen oxides (NOx). VOC's result from the evaporation of gasoline and other solvents, and from vehicle exhaust. NOx results mainly from burning fossil fuels, including gasoline and coal.

Under the CAA Amendments, Title II requires the use of oxygenated fuels as part of the reformulated gasoline program for controlling ground-level ozone formation. Gasoline must be reformulated to meet the fuel formula and performance standards. The fuel formula required is: NOx no greater than baseline fuel, a minimum of 2 percent oxygen by weight, a benzene content not to exceed 1 percent by volume, no heavy metals, and a maximum of 25 percent of aromatics by volume. The performance standard sets the reduction limits on the emission of ozone-forming VOC's and air toxics, relative to baseline fuel.