Intersecting Trends of Oil and Ethanol

by Patrick C. Miller (Ethanol Producer Magazine) Is the growth in shale oil production a potential boost for ethanol? The theory goes that because the light crude produced from fracked shale produces lower-octane gasoline, greater oil production from shale will translate into an increased demand for ethanol as an octane booster. However, the idea that a flood of sweet, light crude entering the market would result in an increased demand for ethanol has been around for more than two years and, thus far, remains a theory.

“Those crudes from what they call light, tight oils from shale formations do contain a very poor octane gasoline material,” says Dave Hirshfeld, co-founder and president of MathPro Inc. in Washington, D.C. “That had the effect of forcing refiners to install processes to upgrade the octane of those fractions or to sell the lightest part of it into the natural gas liquids market at a pretty stiff discount just to get rid of it.”

More can be made by selling shale oil in the export market than by selling the crude to Gulf Coast refineries, he says, ...

“We’re still importing oil, but we’re importing half of what we did before. We’re still importing gasoline, but we’re exporting more. We’re still importing some into PADD 1, but we’re exporting twice as much out of PADD 3.” The petroleum administration district PADD 1 includes the East Coast states from Maine to Florida. PADD 3 covers the Gulf Coast from New Mexico to Alabama.

John Auers, executive vice president of Turner Mason & Co.—a Dallas-based firm that provides engineering and management consulting services for the petroleum and petrochemical industries—believes the increased investment in U.S. shale oil will be of some benefit to the ethanol industry.

“A bigger tailwind for ethanol would be a potential future requirement for high-octane gasoline to meet the higher fuel efficiency engines that might be required.”

Both Auers and Hirshfeld agree that the ethanol industry’s future will likely be affected more by what policymakers in Washington, D.C., decide than by trends in crude production or refinery output, although they also believe market forces will play a role.

“The Trump administration looks like it might rescind the approval of the 2022-’25 stringent CAFE standards that would drive the high-octane fuel requirements,” Auers notes. “The administration is going to do its own review about what should be done for the ’22-’25 model years. That’s potentially the biggest driving force for the need for higher octane gasoline and would provide an opening for ethanol.”

Until the administration—through the U.S. EPA and Department of Transportation—decides within the next year or so, Auers says automakers, the ethanol industry and the oil industry are in a state of limbo. “The Trump administration might go for something in between,” he says. “They could reduce the standards. If that happens and we don’t have a requirement for high-octane gasoline, that’s a negative for ethanol. The more stringent the fuel efficiency standards, the more you require high-compression engines that need higher octane fuel. That provides an opening for ethanol.”

“There could be changes for the better or for the worse in ethanol exports, which right now are running unusually high because of Brazil,” Hirshfeld says. “They’ve been diverting sugarcane to make sugar instead of making ethanol. The marketplace down there still needs ethanol. They’ve been importing somewhat more than they usually do from the U.S. That could change one way or the other.”

Auers points out that some countries that use lead as an octane booster are moving away from it and there’s a trend toward higher compression engines, which would also increase the demand for ethanol overseas. “At this point, it’s not defined how much of a driving force there is for premium demand internationally, but I think directionally it should grow some,” he says.

Hirshfeld allows that even if more stringent CAFE standards are eventually implemented, technical challenges remain. “Some of the octane requirements go beyond what the refiners can realistically deliver with hydrocarbons,” he says. “What midlevel ethanol blends would be authorized by EPA? E20, E25 or E30? One government lab is even looking at E40. These can get you significantly higher octane. If those fuels came into use, they would do great things for ethanol demand.” READ MORE