MarketWatch: The danger of too much ethanol

July 17, 2013

Josiah Neeley, July 17- America’s auto makers and refiners are getting nervous. Federal law requires a minimum amount of ethanol to be blended into American gasoline, the mandated minimum for all types of ethanol rising over time, from a total of 9 billion gallons in 2008 to 36 billion gallons (including 15 billion in corn ethanol) by 2022.

These numbers, however, were set prior to the financial crisis, and assumed a continued trend of increasing gasoline usage. Instead, tough economic times have resulted in Americans driving far fewer miles. Americans drove approximately 93 billion fewer miles in 2012 than in 2007, and this, combined with greater fuel efficiency for newer vehicles, resulted in an 8 billion gallon decline in gasoline consumption since 2007.

This combination (increasing mandates with decreasing gasoline used) means that refineries are fast approaching what is known in the industry as the “blend wall,” the point at which all gasoline sold in the United States contains at least 10% ethanol. This is significant, because the warranties for most American car engines do not extend to ethanol concentrations beyond 10%.

Once the blend wall is reached, refineries may find themselves either subject to hundreds of millions in fines or paying hundreds of millions for offsetting credits. The price of a credit for corn-ethanol increased from less than 5 cents to over $1 in early 2013, before falling to a still high rate of around 50 cents.

In response to this predicament, last year the Environmental Protection Agency waived legal restrictions and allow refineries to increase the amount of ethanol blended into gasoline from 10% to 15% — although auto makers will not extend the engine warranties beyond 10%.

Raising the ethanol content of gasoline beyond 10%, however, can have some nasty consequences for people’s pocketbooks and even their safety. Use of E-15 could decrease fuel efficiency by as much as 30%.