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Crashing Into the Ethanol Blend Wall

Geoffrey Styles's picture
GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

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  • Aug 8, 2013

Ethanol Blend Wall

  • The long-anticipated arrival of the ethanol “blend wall” for gasoline is the inevitable result of a federal policy designed for a world of expanding gasoline sales that no longer exists.
  • This is not just another arbitrary crisis; it is already costing consumers at the pump, and those costs will increase unless the Renewable Fuel Standard is reformed or repealed.

The Energy and Commerce Committee of the US House of Representatives held hearings late last month on the Renewable Fuel Standard (RFS). It’s otherwise known as the ethanol mandate, although it covers biodiesel, as well. The hearings were timely, since at least two bills have been introduced to reform or repeal the RFS.  During the session on July 23rd, Rep. Waxman (D-CA) referred to the “gasoline blend wall, which may be around the corner.” In fact, a review of current gasoline sales and this year’s final ethanol target–just issued yesterday!–confirms that the ethanol “blend wall” has arrived, at least for some of the nation’s refiners. That explains the urgency of the debate about the future of the RFS.

The blend wall is simply the threshold at which the RFS requires more ethanol to be blended into US gasoline than the quantity necessary to dose essentially all of it with the maximum 10% ethanol content for which most cars on the road were designed. Because the Environmental Protection Agency, which administers the RFS, has been unwilling to exercise its flexibility under existing law, the fuels industry must now choose from a set of unattractive options: It can limit mainstream gasoline to 10% ethanol content and absorb substantial RIN costs (see below) or statutory penalties for failing to blend the required volumes of biofuel. It can produce less gasoline than the country needs, or export more of its production, to reduce its renewable fuel obligations. Or it can produce higher-ethanol blends such as E15 and risk the integrity of millions of cars and large portions of the country’s fuels infrastructure, including all but the newest gas station pumps and tanks. All of these choices affect the price consumers pay at the pump.

In order to understand why the blend wall is a serious problem, rather than another arbitrary crisis, we need to examine its two main elements. The first is fairly straightforward, relating to the mechanical integrity of the pumps and seals in automobile engines and fuel systems, as well as refueling infrastructure. While most of these function acceptably with blends of up to 10% ethanol in gasoline, there’s significant controversy about what happens above that threshold. As I noted in June, this issue has become relevant much sooner than the 2007 law anticipated, because US gasoline sales have declined instead of continuing to grow by 1-2% per year, while sales of E85 remain small and mainly regional.

As the head of the American Automobile Association (AAA) indicated in his testimony before Congress, any new product like E15, which consists of 15% ethanol and 85% petroleum gasoline, should have been tested thoroughly before release. Although the EPA conducted extensive testing before certifying E15 for use in 2001 and later model cars, as best I could tell their focus was on vehicle emissions systems, rather than mechanical integrity. Other tests conducted at the behest of the fuels industry identified problems with higher ethanol blends in vehicles not specifically designed as “flexible fuel vehicles” (FFVs) which can use up to 85% ethanol. UL previously tested existing service station product dispensers (gas pumps) and observed leaks and other failures above 10% ethanol. The uncertainties that have been raised by independent testing may not be conclusive, but they can only be resolved by a lot more testing on actual vehicles, not by rhetoric. The bottom line for consumers is that most carmakers won’t warrant any but their latest models for use with E15.

Another important but more obscure aspect of the blend wall relates to a feature of the RFS called Renewable Identification Numbers, or “RINs”. The RFS regulations created RINs for tracking purposes, to provide “the basic framework for ensuring that the statutorily required volumes of renewable fuel are used as transportation fuel in the U.S.” But they also have another purpose. RINs can be separated from the physical gallons of renewable fuel and traded in the market, effectively becoming paper ethanol. Enabling this RIN market, which includes both “obligated parties” — mainly refiners and importers of finished gasoline — and non-obligated parties such as gasoline blenders and traders, provides some flexibility in the RFS compliance system. It allows refiners that cannot blend any more ethanol into their direct fuel sales — or cover their typically larger sales of pre-ethanol product — to satisfy their legal obligations under the RFS by presenting a certificate, instead.

This worked reasonably well when the annual blending target was lower and refiners and marketers could bank RINs for future use by blending more ethanol than required, while remaining under the 10% limit. However, only 20% of the RINs generated in that manner last year could be carried over into 2013, restricting the supply just when the market approached the overall 10% blend wall. My understanding from those who follow this market is that this “bank” will become insolvent sometime next year, limiting new RINs largely to those generated from sales of E85 in the Midwest.

Now, with the blend wall a reality, the limited stock of RINs from past blending is being drawn down at prices that have spiked from a few cents per gallon-equivalent at the start of the year to well over $1.00 recently. Some refiners are spending hundreds of millions of dollars on RINs. It’s hard to determine how much of that is being passed on to consumers in fuel prices, because of the complexities of the RIN market and the agreements that various participants have made concerning the allocation of RINs. If 100% of their cost were passed on, then RINs at $1.00 would add $0.10 per gallon to the price of gasoline at the pump. The higher the annual RFS target ratchets, the higher RIN prices could go, with a recent estimate setting the potential impact on gasoline prices in 2014 at $0.19/gal, with the possibility of even larger increases in diesel prices.

Another potential outcome mirrors a comment made the hearings by the CEO of Cumberland Gulf Group, a large gasoline distributor. He characterized the functioning of the RFS and its RIN provisions as “subsidizing exports and taxing imports.” Refiners that don’t have enough RINs to cover their gasoline production will weigh current RIN prices against the profit they could generate by exporting more of their output to other countries, thus reducing the volume that must be covered by RINs. This could have an even bigger impact on the US gasoline market than merely passing through the cost of RINs. That’s because gasoline prices are set by the last increments of supply and demand, and small shortfalls can translate into large price increases. That’s exactly what seems to be happening now in the artificial market the EPA has created in RINs.

The original purpose of the RFS and the law that established it was to reduce US reliance on imported oil, along with reducing greenhouse gas emissions. Because of its lower energy content the ethanol blended into US gasoline this year displaces about 540,000 barrels per day of gasoline produced from petroleum, though with questionable environmental benefits. That’s almost exactly the average quantity of finished gasoline and gasoline blending components exported from the US in the last 12 months reported.  Although that might be at least partly coincidental, it’s a further indication of just how much our national energy situation has changed since the legislation establishing the current RFS was passed in 2007.

One of the experts appearing before Congress characterized ethanol as an additive, rather than a replacement fuel. Until and unless E85 sales grow dramatically, that seems apt. Our elected representatives should now be asking themselves whether it makes sense — in light of altered circumstances — to subject the US motor fuels market and consumers to a new and entirely artificial source of price volatility for the sake of an additive that the CEO of Growth Energy, a major ethanol trade association, testified would continue to be produced and sold in the absence of the mandate. When considered together with serious questions about its impact on food supplies and prices, the case for at least reform of the Renewable Fuel Standard is compelling.

A different version of this posting was previously published on Energy Trends Insider.

Photo Credit: Ethanol Blend Wall/shutterstock

Rick Engebretson's picture
Rick Engebretson on Aug 8, 2013

For disclosure, I have nothing to do with ethanol. I don’t raise corn or feed livestock, and I am even the designated driver (I don’t drink) when my wife and I go out. Although I too often defend ethanol fuels, it is only because the whining is so absurd.

The oil industry knows lots of chemistry. It is absurd they claim they are forced to “blend” an agricultural waste product that is provided them as pure and non-toxic as it gets in the fuels industry. One day the oil industry is so smart they say they can safely drill under the ocean floor or Memphis, sideways. The next day they are too helpless to convert a relatively incompatible fuel to a more compatible fuel.

The oil industry needs to realize that for people to buy gasoline, they first need to buy food. Cost effective agriculture sells gasoline. A situation unlikely to change.


Geoffrey Styles's picture
Geoffrey Styles on Aug 8, 2013


You made a similar comment recently, and I’ve been thinking about the chemistry angle you suggest. One could make a variety of products from ethanol, starting with hydrogen, ethylene, and simple esters. It’s hard to see how it would make economic sense to use ethanol priced at $30/MMBTU to make either of the first two, when natural gas sells for just over a 10th of that. The esters might be more interesting. Other than economics, I see two challenges to overcome:

1. Modern refineries really only do 3 kinds of chemistry today: a) Separating crude oil and other feedstocks by boiling point. Ethanol is already separated. b) Breaking long molecules into shorter, more valuable molecules. Ethanol already falls into the same broad category as the outputs of these processes, rather than the inputs. c) Eliminate impurities such as sulfur from the final products. Ethanol has no such impurities. So within an existing refinery, I’m at a loss to see a piece of existing hardware that would turn ethanol into something more compatible and useful without just producing a lot of low-value fuel gas. (Yes, I’ve omitted catalytic reforming of C5-C8 alkanes and cycloalkanes into aromatics, and acid-catalyzed alkylation of propylene and butylene, but ethanol doesn’t seem like a useful feedstock for either of those, either.) 

2. Accounting for the conversion, disappearance and ultimate recombination of ethanol within a refinery might be challenging if the goal is to claim credit for it under the RFS, which is the motivating force behind its current level of use.

If you have a different process and outcome in mind, I’d be very interested to hear your ideas. Otherwise, assuming that refiners ought to be able to do something better with it than blend it doesn’t seem to add much to the debate.

Rick Engebretson's picture
Rick Engebretson on Aug 8, 2013

Geoff, there was a time when the petrochemical industry could invent synthetic rubber tires when needed. You and I both probably remember trying to read Chemical Abstract Indexes, then hunting the bound books. Literally tons of research, by thousands of highly skilled chemists and engineers. I felt honored to be in the midst of such a quest.

Yes, things have changed. I don’t currently have Research Abstract Search priviledges on my computer. Maybe chemistry ended 30 years ago? Apparently the oil industry has too much ethanol, while insisting they need Keystone XL dilbit and fracking rights under the much of the US. Everything just seemed smarter than that 30 years ago.

Geoffrey Styles's picture
Geoffrey Styles on Aug 8, 2013


You might be giving me too much credit there. In any case, for me the big clue is that even at $2.14/gal (today), on a crude-oil equivalent basis ethanol works out to $160/bbl.  That’s some expensive feedstock to turn into $120/bbl gasoline at the refinery gate.

John Miller's picture
John Miller on Aug 9, 2013

The EPA finalizing the RFS requirements for 2013 and indicating their intention to possibly reduce required ethanol blending next year would be a big improvement over their past blend-wall strategy of requiring E-15 warning labels only.   The 2013 RFS does represent a 9% increase in biofuels over the 2012 RFS.  (Re. 2013 RFS and 2012 RFS)

Geoffrey, one factor rarely discussed about RFS2 compliance is the fact that for the biofuels to qualify or be certified as a ‘renewable fuel’ under EISA 2007 (or validated for issuing RIN’s) their ‘lifecycle GHG emissions’ must be 20% – 60% less than the petroleum motor fuel displaced.  (Re. Table 2. EISA-Mandated Reductions in Lifecycle GHG Emissions by Biofuel Category).  Have you heard of or seen any recent documentation for the EPA certifying or auditing individual biodiesel or ethanol production facilities for compliance with EISA 2007 lifecycle GHG emissions?


Rick Engebretson's picture
Rick Engebretson on Aug 9, 2013

Geoff, the only person I give too much credit to is myself. How could I not be amazed at the accomplishments of the last 40 years??

Men have walked on the moon. I started college using a slide rule, first programmed a computer with punch cards, cars and people have multiplied yet we have had peace and prosperity with a clean environment and remarkable technology development.

Most of all for me, a family member was cured of cancer over 20 years ago. I vowed then to convert a Norwegian barn into a Norwegian church (and it will likely kill me). We live in a world full of opportunity and good people and success stories.

Nothing I hate more than preachers of failure we seem now to have in abundance. And you are NOT one of them. The nickels and dimes issues should be re-negotiated, as John discusses above. But we are feeding and fueling more people better all the time. You are an important resource keeping it on track.

Geoffrey Styles's picture
Geoffrey Styles on Aug 9, 2013


Heard, yes; seen, no.

The positive note here is EPA’s explicit recognition that the RFS’s escalating targets conflict with reality, even if it’s not clear that they recognize all of the problems the mandate is causing. My main concern with this week’s announcement is embodied in the word “anticipates” in their statement about 2014. Even in Beltway-speak, that’s not a firm commitment. While the RIN market dropped ~30% within 48 hours of the 2013 rule being issued, delays in announcing an aggressive adjustment in next year’s targets can only support higher RIN values in the future. What’s missing here are the details of when, how much and crucially, at whose expense they will trim.

To wait so long to say anything, and then say only this much, makes it look like they’ve deferred the tough calls to Congress.

John Miller's picture
John Miller on Aug 9, 2013

The EPA’s lack of committal to specifically address the ethanol blend-wall this year has apparently created a ‘uncertainty’ that has negatively impacted the RIN market.  This is but another example of how our government’s ongoing regulatory uncertainty or lack of specific future actions can very negatively affect the economics of different markets.

Alistair Newbould's picture
Alistair Newbould on Aug 11, 2013

From the original post it sounds to me as though the system is working. Have I got this right –

1. the industry is obliged to mix a certain amount of ethanol (sustainably produced) into fuel in total. 

2. this is on an increasing scale which has been known for some time

3. Many vehicles cannot run on a 10% blend, but newer ones can and some can run on as much as 85%

4. Petrol pumps may leak if a higher blend is pushed through them, or they may not

5. So, blend lots of ethanol into some fuel for the new pumps you can build to dispense it to the new cars we can buy to burn it.

6. blend less into some other fuel to go through the old pumps and cars.

7. As the price of ethanol credits rises, so the price of low ethanol fuels will rise and there will be an added incentive (if the dangers of global warming are not incentive enough) to speed the replacement of pumps and cars.

Simon Friedrich's picture
Simon Friedrich on Aug 11, 2013

The big problem with the “system” is that ethanol from corn results in the emissions of more global warming greenhouse gases than just using gasoline.

Alistair Newbould's picture
Alistair Newbould on Aug 11, 2013

Hence the word sustainable in my comment. I agree totally. Using scrub and marginal land to grow willows for conversion to ethanol and plastics is paret of the answer here. Palm oil groves are not. There are a lot of “waste” products which can be converted to biofuel, as well as direct cropping such as willow.

Alistair Newbould's picture
Alistair Newbould on Aug 11, 2013

Just looking at the numbers and the concern for increased gas prices at the pump. You mention an increase of potentiallly 19 c / gallon. In NZ we recently had a tax increase in the price of petrol – sold here per litre – 0.26 of a US gallon. New tax (earmarked for roading) added 3 c a litre (12 c NZ = 9.5 US c per US gallon) and will again annually for the next 3 years – so pretty much 1/2 what you are talking about as a worst case every year for the next 3 years. Now put that in perspective – we pay $2.26 a litre of petrol which equates to $7.00 US per US gallon. How much is “gas” where you live?


Just asking.

Anything that encourages humans to leave oil in the ground alongside coal has to be good.

Geoffrey Styles's picture
Geoffrey Styles on Aug 12, 2013


No doubt there’s ample non-food biomass to make a big dent in gasoline consumption.  The obstacle is still the conversion technology.  Here’s last month’s press release for the “first commercial-scale cellulosic ethanol plant”, using waste as a feed:   Curiously, no reference to capacity, which from this article appears to be 16 million US gallons per year:  That’s less than 1/5th the capacity of a typical corn ethanol plant, and works out to the energy equivalent of around 700 barrels per day of gasoline (1% of the gasoline output of a typical oil refinery) or roughly the production of a single oil well in the Bakken shale.

It’s a start, but the technology has a long way to go to demonstrate full-scale competitiveness, even within the current system of incentives and mandates supporting biofuel.

Your ealier comment suggested that to an outside observer, the RFS system seems to be working. However, your much higher fuel prices–how long have you had those?–driven mainly by taxes, where at least the revenue is predictable and can be chanelled to purposes that have been selected by your elected representatives, are quite different in both principle and effect from a system in which the RFS balancing mechanism is creating a windfall for a handful of traders.

Rick Engebretson's picture
Rick Engebretson on Aug 12, 2013

Geoff, citing a few “for the record” initiatives, and their highly constrained contexts, misses the point.

Billions of people need next generation transportation that can’t be provided by current technology. It is the “off the record” and “off the radar” development that should concern the energy industries. We can only hope that new fuels and new drive systems won’t be patented. A market exists larger than the oil industry ever enjoyed. It is impossible that new options are not being researched.

We don’t make thin screen TVs or our stuffed shirts anymore. We don’t even send people into space anymore. We don’t even pay our own bills anymore. Pomposity and gloating are not appealing.

Geoffrey Styles's picture
Geoffrey Styles on Aug 12, 2013

I hope you didn’t mistake my comparisons to conventional energy for gloating. This is simply about scale, as you indicate, too. Today’s “on teh record” cellulosic technology hasn’t achieved it yet, so continuing to mandate its use is what I regard as missing the point.

You’re absolutely right about the size of the potential global market, and I, too, hope that there are more new technologies in the works than what we see reported. Unfortunately, too many of the “off the record” ones I have encounterede appeared either to violate basic laws of science or depended on the well-known development step of “insert miracle here.” The experience makes me a little more hesitant about jumping on bandwagons.

Alistair Newbould's picture
Alistair Newbould on Aug 13, 2013

Thanks for the reply Geoffrey and the very interesting links, The first article mentions 8 million gallons per annum so they look a bit confused. However, 8 million gallons or 1/2 an oil wells production from the first commercial scale plant is great progress. It looks like there are real sustainable ways of making ethanol that don’t compete with food production. All power to them – and if the RFS scheme is encouraging this development then again I say it is working. Leaving 1/2 an oil wells worth of oil in the ground is a great start.

In answer to your questuion petrol (gas) here has been around $2 NZ a litre for 4 – 5years now, recently jumping by 10%. How many Vero’s could you build if US gas doubled in price and the extra went to sprouting up ethanol plants across the country? Wow!

Geoffrey Styles's picture
Thank Geoffrey for the Post!
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