The Energy Collective Group

This group brings together the best thinkers on energy and climate. Join us for smart, insightful posts and conversations about where the energy industry is and where it is going.

9,962 Members

Post

The "Four-Gallon Rule": Another Unintended Consequence of Ethanol Policy

Image

The energy field is replete with unintended consequences, and US policy promoting ethanol fuels has had more than its share.  The growing competition  between food and fuel uses of corn, amplified by the current drought, is a prime example, along with the so-called “dead zone” in the Gulf of Mexico that has been exacerbated by the extra fertilizer used to boost corn yields enough to meet the rising demands of the federal Renewable Fuel Standard (RFS).  Most of these effects occur out of the sight of average consumers, but here’s a new one that could start showing up at a gas station near you, very soon: the EPA’s “four-gallon” rule.  As a result of EPA’s decision to allow gasoline blenders to sell fuel containing up to 15% ethanol, and in recognition of the adverse consequences of high-ethanol blends for small engines, gas stations will be required to post signs enforcing a minimum purchase of four gallons from certain pumps.  This is yet another indication that the EPA has put expediency above prudence in giving its approval to a fuel that is not ready for mass-market distribution. 

A little background is necessary to understand how we reached this point.  In 2007 the Congress passed the Energy Independence and Security Act that included the RFS, mandating dramatic increases in the quantity of ethanol blended into gasoline.  Unfortunately, its passage coincided with a sea change in the gasoline market. Prior to the financial crisis and recession, US gasoline demand had been growing by 1-2% per year for decades, and on that pace there should have been ample future gasoline demand growth to accommodate all the additional ethanol that Congress was instructing the EPA to require refiners and gasoline blenders to add, by means of the standard blend of 90% gasoline and 10% ethanol.  Instead, gasoline sales fell by more than 3% in 2008 and still haven’t recovered their 2007 peak, running about on par with 2002 this year.  When you do the arithmetic, that means that instead of being able to absorb over 15 billion gallons of ethanol this year, the market can only handle around 13 billion gallons–barely enough to satisfy the 2012 mandate level and 2 billion short of the amount required in just three years.  (This ignores cellulosic ethanol requirements, which have been revised downward each year as commercial production fails to appear.)

With sales of 85% ethanol E85 trickling along at levels too low to stave off the approaching “blend wall”, the ethanol industry applied in 2009 to be allowed to increase the ethanol dosage in gasoline from 10% to 15%, requiring an EPA waiver of existing regulations.  That waiver was granted in 2010 for cars made after model-year 2006 and later extended for cars made after model year 2000, in spite of continuing concerns about its impact on the engines and fuel systems of all cars not labeled as “flexible fuel vehicles”, as well as testing by UL indicating that some existing gasoline dispensers failed in dangerous ways when ethanol blends above 10% were introduced. 

The four-gallon rule is part of the EPA’s ongoing contortions, in the form of gas pump labeling and “misfueling mitigation plans“, to make sure that E15 doesn’t get into the wrong vehicles, or worse yet, into small engines–lawn mowers, string trimmers, boats, etc.–where it has been found to cause potentially serious problems.  So in addition to labels indicating that E15 is only approved for 2001 and later automobiles, the EPA is instituting a minimum sales quantity rule to prevent someone from filling a gas can for use in a small engine with E10 from a “blender pump”–one that can dispense either E10 or E15 on demand.  That’s because even after the pump is switched to E10, enough higher-ethanol fuel could remain in the hose to skew the ethanol content of the first few gallons delivered. (I’d suggest that this ought to be of concern to motorists, as well.)

I’m sure the EPA sees its new four-gallon rule as a sensible measure to protect the owners of small consumer or industrial engines from damaging their equipment. Yet from my perspective outside the bureaucracy it looks like another symptom of an E15 policy that falls short of the prudence necessary when dealing with the retail distribution of motor fuels and borders on regulatory malpractice.  At some point in the process someone in EPA should have held up his or her hand and pointed out that the obvious solution was not layering increasingly impractical and downright weird regulations onto already overburdened gas station operators, but to call for a fundamental reexamination of a Renewable Fuel Standard that has been overtaken by unforeseen events.  And that’s without even considering that the lower energy content of the extra ethanol equates to a new $0.07 per gallon tax on gasoline at current prices. The publicity surrounding this issue provides an ideal opportunity for one or both presidential candidates to commit to suspending the E15 program, pending a thorough review of the RFS and its implementation. 

 

Geoffrey Styles's picture

Thank Geoffrey for the Post!

Energy Central contributors share their experience and insights for the benefit of other Members (like you). Please show them your appreciation by leaving a comment, 'liking' this post, or following this Member.

Discussions

Robert White's picture
Robert White on September 20, 2012

I challenge the author to find a statute, rule or reg that states there is a 4-gallon minimum purchase requirement. You won't find it, it doesn't exist. It is in a retail advisory published by the Renewable Fuels Association (RFA) as part of the E15 Retailer Handbook. It is merely a suggestion for retailers on how to sell E15 from the same hose as other gasoline. If they can show that they do not need the minimum volume, or it can be lower, they will be able to sell it that way. The whole scenario only plays out this way if the E15 retailer has single hose dispensers (only 65% of all dispensers today are single hose), and he/she sells E15 at every fueling position (not the case at 87% of E15 retailers selling from single hose today). The small engine and motorcycle community are trying to cause hysteria, unfortunately it just is not reality. After 30+ years, E10 does not have the overall concentration that is being painted by the above groups, why do they think E15 will be there overnight?

Geoffrey Styles's picture
Geoffrey Styles on September 20, 2012

I wish you were right.  I can understand your confusion about the rule, since it isn't laid out very clearly on the EPA's site.  First, take a look at the text on EPA's "Misfueling Mitigation Plans" page (also linked in the post) in which EPA indicates the use of RFA's "Model E15 Misfueling Mitigation Plan"--incorporating the RFA Handbook you referenced and I linked to above--as a standard basis for approval of companies' misfueling plans.  That alone makes it more than a suggestion. 

Next, I would refer you to the EPA's letter of 8/1/12 to the American Motorcyclist Association, signed by the Acting Director of Compliance. It has been widely publicized.  It states, in part:

"In the approval letters sent to companies submitting MMPs, EPA requires that retail stations that own or operate blender pumps either dispense E15 from a dedicated hose and nozzle if able, or, in the case of E15 and E10 being dispensed from the same hose, require that at least four gallons of fuel be purchased to prevent vehicles and engines with smaller fuel tanks from being exposed to gasoline-ethanol blended fuels containing greater than 10 vol% ethanol." (The MMPs referred to are the Misfueling Mitgation Plans.)

Furthermore, in the sample approval letter linked on the Misfueling Mitigation Plans web page, it states:

"Specifically, for a nozzle dispensing both E10 and E15, a minimum transaction of 4 gallons must be required for E10 purchases and communicated to consumers by means of a prominently placed label stating "Minimum Fueling Volume 4 Gallons; Dispensing Less May Violate Federal Law."" 

When you go through all that I don't believe it leaves much room for ambiguity about whether the four gallon minimum is intended to be optional or mandatory for the pumps in question. EPA has a real dilemma here: If it's truly concerned about keeping E15 out of small engines and pre-2001 cars, it should require dedicated E15 pumps.  However, it must realize that requiring that level of investment for a new product with a limited initial market and no possibility of charging a premium over E10 to recoup the required investments would slow down the rollout or bring it to a halt.  Both EPA and the administration are conflicted, in the sense of having to choose between sustaining their RFS policy--which stalls without E15--and the public good.  Reforming the RFS remains the "A" answer.

 

 

 

 

 

 

 

 

John Miller's picture
John Miller on September 20, 2012

Geoffrey, the EPA never fails to amaze.  I wonder how many retailers are planning to install new buried fuel tanks to store separate neat gasoline (RBOB) and ethanol (EtOH), and upgrade/replace their pumps to blend gasoline with ethanol onsite.  They also have the option of discontinuing sale of mid-grade (octane) gasoline and only sell regular and premium instead. The existing gasoline blending terminals will also have to rearrange existing configurations since they currently are designed to receive RBOB and EtOH and blend them into E-10 (and now E-15), and ship the finished blended gasoline via truck to retail outlets.  This E-15 retail onsite component blending proposal would require shipping separately neat RBOB and EtOH blend components, which would require new/reconfigured terminal storage and truck loading racks.  I wonder how many existing gasoline terminals are planning to modify their hardware and operations to accommodate this new operation.  And, do not forget the added complication created by requiring separate RBOB(15) specifications at refineries to meet the new E-15 finished blend specifications (such as RVP), in addition to the current-different RBOB(10) spec’s required for E-10.

I know this is a lot of detail, but it does help illustrate the huge infrastructure complications that are created when Government bureaucrats create new rules to accommodate (in this case)  ‘special interest’ goals without consulting the Industry ultimately responsible for fuel quality.  As you are aware, strict fuel quality control is required for ensuring all marketed fuels meet all standards/specifications for clean burning and reliable motor fuels.  The EPA will, of course, be there to penalize those who don’t meet all quality specifications.

By the way, have you heard if the EPA has done their job yet of ensuring that their new E-15 gasoline mandate won’t actually increase vehicle tailpipe emissions (pollution)?

Geoffrey Styles's picture
Geoffrey Styles on September 20, 2012

John,

When I read the entire original E15 waiver document, they were very specific about their testing having covered the integrity of vehicle emissions hardware/systems, but vague about engine and fuel system durability and other issues.  I don't recall whether they tested tailpipe emissions from E15-fueled cars to ensure they didn't go out of compliance. Have to check that some time.

And thanks for adding the additional details about the distribution system challenges. One gets the impression that the administration assumes that all aspects of the petroleum business are as profitable as pulling oil and gas out of the ground, or that integrated companies are still happy to carry low-return businesses for the nebulous benefits of integration.  That concept went out the window in the '90s, and the integrated majors have been gradually exiting refining and retail ever since.  So the folks that will bear the burden of implementing these new rules are mainly distributors (independent small businesses) and independent retailers operating on margins that depend as much on selling soda and candy as on fuel sales.  I would love to get a comment on this from an actual retailer.

Rick Engebretson's picture
Rick Engebretson on September 20, 2012

The growing competition between food and fuel uses of corn, the current drought, and dead zone in the Gulf of Mexico might be phrased differently. The competition is between protein and sugar. The current drought certainly maps to corn farming. And the dead zone now extends over much of the farm belt.

I've never promoted corn ethanol, but the industry has been (in its short existence) a strategic exports industry. While oil remains a strategic imports industry.

Where might we go from here? I was interested in a TEC article describing carbon sequestration research using amines. While I don't believe it is a carbon game changer, it is an interesting use of polluting nitrous oxides and CO2 to produce protein precursor amines. Another food technology in the guise of energy technology.

And if the biochemists get off their enzyme cellulose fixation, steam hydrolysis using solar thermal is an option. But geneticists own the discussion.

We are hitting several limits today. Jed Clampett's oil and food solutions are over. And people on both sides of the political fence evade some frightening scenarios.

Geoffrey Styles's picture
Geoffrey Styles on September 20, 2012

Rick,

Not sure I follow your reference to corn ethanol as a "strategic exports industry".  Per the RFA website, exports year-to-date through April were running about 7% of US ethanol production (presumably lower recently), vs. 8.5% last year. Yet they are reported as nil for 2006-10, which makes sense, since the US was importing Brazilian ethanol in that period. The US industry is also facing anti-dumping claims in the EU. 

John Miller's picture
John Miller on September 20, 2012

Geoffrey, I’ve been out of the downstream retail part of the business for a few years, but my past experience/contacts show that most retail stations made the majority of their profits in the (convenience) C-stores.  As you are aware, integrated oil companies normally make most their profits in upstream (oil & gas) production, followed by downstream refining and then distribution & marketing.  Independent refiners have struggled historically and with the recent market performance and increased sales of major oil refineries, the good days of independent refining profits are probably in the past. 

Back in the beginning, oil producer’s needed the refining & marketing industry as a local market outlet for their crude.  This is why major oil companies integrated upstream oil with downstream refining/distribution/marketing.  With time all major oil companies reorganized and split their corporations into ‘business units’ (upstream and downstream).  Each business unit’s P&L was normally based on transfer prices that correlated to average market prices (i.e. assumes refineries buy their crude at free market prices, distribution is profitable, and marketing gets their supply at wholesale market prices).  When major oil companies begin selling upstream or downstream assets that normally means they can’t make a profit in existing markets (i.e. if they were totally independent and not being subsidized by other business units within the corporation).  I have been surprised that non-oil corporations such as Delta Airlines would even consider buying a refinery.  The financial risk is enormous, let alone the need for knowledgeable professionals to operate the facility safely, environmentally compliant and profitably.

As far as distribution and marketing, I’m pretty sure they are also struggling.  I too am curious to hear whether more recent market conditions have actually reduced the need for retail C-stores to sell beer & snacks vs. their market share of petroleum motor fuels?  If the new E-15 rules costs are significant, we are likely to see a large number of independent terminals and retail outlets close in the near future.  I wonder how many additional jobs will then be lost?

Rick Engebretson's picture
Rick Engebretson on September 20, 2012

Sorry, Geoff. I just assumed by now my association of corn ethanol to food protein was familiar. I must remember this is an internet blog between unfamiliar strangers. The US is a strategic exporter of protein food, not corn ethanol. My lazy mistake. Ethanol, again, is waste.

Van Cosby's picture
Van Cosby on September 21, 2012

I've read with interest articles on the enormous amount of gas that we are flaring in the Williston Basin. Why doesn't the oil & gas industry get together with Celanese and put up a TCX plant in North Dakota to turn all of that natural gas into ethanol?

Imagine how dramatically that would change the economics of this discussion.

Geoffrey Styles's picture
Geoffrey Styles on September 21, 2012

Yes, and...If we had outcome-, rather than path-oriented policies, that might make perfect sense.  (I wrote about the Celanese process last year.)  However, since the ethanol produced would be derived directly from a fossil fuel, instead of "renewable" ethanol--around 3/4ths of the energy of which derives from fossil fuels--it would not satisfy blenders' RFS obligations and would thus likely be exported, while US companies bought more expensive renewable ethanol. 

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »