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George C. Marshall Institute’s Washington Roundtable: Cellulosic Ethanol

George C. Marshall Institute’s Washington Roundtable: Cellulosic Ethanol Larry Kumins Executive Vice President Energy Policy Research Foundation Inc. National Press Club Washington, DC July 25, 2007. EPRINC.

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George C. Marshall Institute’s Washington Roundtable: Cellulosic Ethanol

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  1. 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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. Ethanol and MTBE Consumption 2002-2006

  8. 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

  9. 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?

  10. Corn Prices are Rising Relative to Ethanol Prices; Ethanol Profitability Declining • 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?

  11. 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

  12. 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.

  13. Vehicle Fleet Will Slow Ethanol Uptake • 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, only6 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? Implication: if Detroit succeeds, only 25% of new vehicles sold will be FFVs

  14. Recap: Role of Ethanol in the Gasoline Pool

  15. 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

  16. 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

  17. 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 Investment: Ethanol Plant vs. Oil Refining

  18. 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 CycleImplication:Important Role for Cellulosic Ethanol

  19. Thank you Q & A Lawrence Kumins Executive Vice President Energy Policy Research Foundation Inc.larryk@eprinc.org

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