Transcript Biofuels in the United States Transportation Sector

Nicholas Horelik
8/4/08
2008 WISE Intern
Tufts University
Sponsored by the American Institute of Chemical Engineers
1
Introduction
2
Outline
 Definitions and Scope
 Industry Players
 Policy Objectives
 Describing the Recent Growth
 Policy and Market Causes of Recent Growth
 Historically
 Recently
 Current and Future Challenges
 Conclusions
3
“Biofuels”
 Broadly:
Any fuel derived from biomass
 For This Presentation: Ethanol
 Other biofuels are worth mentioning, but in analyzing
past policy, ethanol provides the most information
 Biodiesel
 Algae-Derived Fuels
 Other Alcohols
4
Industry Players
 Ethanol Producers
 Corn mills in the Midwest

Sell ethanol as well as other valuable co-products
 Fuel Blenders and Retailers
 RBOB mixed with ethanol for reformulated gasoline
 Vehicle Makers
 Regular Vehicles

Low blends of gasoline and ethanol: E10 or lower
 Flexible Fuel Vehicles (FFVs)

High blends: E85
5
Policy Objectives
 Replace 30% of Gasoline Use by 2022
 According to the RFS, most of the replacement will
come from ethanol
 Half of this ethanol will be from cellulosic feedstocks
 Economic Catch 22
 No Demand? No Infrastructure is Built
 No Infrastructure? No Demand Develops
6
Significant Recent Growth
7
Use of E85 in Vehicles
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What Brought About This Growth?
 Market Conditions
 High gasoline prices made ethanol competitive
 State and Federal Policies
 Tax preferences kept the industry solvent
 Regulations and mandates created the demand
Historically, indirect policies and market conditions
have had the greatest effects…
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First: Historical Context
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Pre-1970s Ethanol Developments
 Early 1900s
 Ethanol was relatively ubiquitous

1907 – Texas oil becomes popular
 Early 1930s
 Gasoline-Ethanol Blends Marketed

Lead replaces ethanol as the octane booster of choice
 The Great Depression + Dustbowl
 Incentives for Farmers Proposed

Shot down by the petroleum lobbies
 World War II
 Ethanol Production Increased

Used for non-fuel purposes
But ethanol never actually caught on…
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The Energy Crises of the 1970s
1.
Oil Embargo 1973
2.
Instability in the Middle East in 1979

Policies Promoting Alternative Fuels Enacted


Taxes, R&D Money, Investment Incentives
By 1984, there were 163 ethanol plants producing
510 million gallons annually
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Ethanol Growth Stalls
1.
2.




The Oil Glut of the 1980s
Reagan Non-intervention
Investment incentives not renewed
Gasoline was more competitive
By 1985, only 74 plants were still in operation
(45% of previous year)
The ethanol industry did not gain a stable
foothold, but the seeds were planted…
Setting the Stage for Today’s Growth
 Lead phased out by 1986
 Replaced with MTBE and other ethers
 Oxygenate requirements – Clean Air Act Amendments
 MTBE gained widespread use
 CAFE standards – EPCA1974, EPACT1992
 FFVs produced and purchased by fleets
 Taxes preferences remained
 Ethanol import tariff
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Why Biofuels Are Attractive Again
1. Energy Prices Are Rising Again
 Global Growth Raises Oil Demand

China and India
 Slowed US Economy
2. Environmental Concerns
 Global Climate Change and CO2
But that’s not why production capacity jumped in recent years…
MTBE Phased Out
Keeping the Demand Strong
1. Federal Mandates

The Renewable Fuel Standard
 Blenders and refiners can be fined for not using the
mandated amount
2. Fleet Requirements

Executive Order 13423 in 2007
 Annual 10% increases in non-petroleum consumption
19
Current and Future Challenges
 Building Up Distribution Infrastructure
 Shipping methods expensive, at capacity
 Getting Away From Corn
 Many concerned about food prices
 Economic Troubles
 Arguably, subsidies are required to keep many producers
solvent
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Looking To the Future
 You can subsidize to maintain solvency, but only
increased demand will actually make the market move
 The demand created by MTBE is now saturated
 Next Steps:
 All gasoline blended with 10% ethanol
 All gasoline blended with 20% ethanol
 Move to higher blends such as E85
Cellulosic MUST become viable for any of this to happen…
Conclusions
 Regulations and mandates are the most effective way
for government policy to affect market demands
 Even though it can affect prices negatively
 It is imperative to maintain government aid and
regulations if the ethanol industry is to obtain a
permanent foothold before gas prices fall
 Specifically for new infrastructure
 Other alternative fuels shouldn’t be ignored
 Perhaps the market should decide which renewable
environmentally friendly alternative is the most
advantageous
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Thank You
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