June 29, 2022

Biofuel usage expected to stay strong

CHICAGO — The future of biofuels is a complicated topic.

“I’m very confident biofuels will play an important role in our global energy future, but I expect it to be a bumpy ride,” said Scott Irwin, Laurence J. Norton Chair of Agricultural Marketing in the Department of Agricultural and Consumer Economics at the University of Illinois.

The Renewable Fuel Standard program was created by Congress.

“That set the volume standards for usage of biofuels in surface transportation in the U.S. from 2008 to 2022,” said Irwin during the 2021 Midwest Agriculture Conference hosted by the Federal Reserve Bank of Chicago.

“It was a very ambitious goal — by 2022, we were supposed to be using 36 billion gallons of biofuels,” said Irwin during the virtual event. “It was to be comprised of 15 billion gallons of conventional biofuels and 21 billion gallons of cellulosic ethanol.”

U.S. ethanol production ramped up rapidly from 2007 to 2011 as mandates were implemented.

“Production flattened starting in 2016 to 2017 at 15 to 16 billion gallons,” Irwin said. “That includes domestic usage and exports, so we never made the 15 billion gallons of ethanol usage in the U.S.”

The percentage of total gasoline volume represented by ethanol grew up to 2010.

“We have been stuck at the 10% rate of blending, which is often called the E10 blend wall,” Irwin said.

Biomass diesel production has increased by 2.5 billion gallons annually.

“But the total level is about one-sixth of the size of ethanol,” Irwin said. “The blend rate increased until 2016 to 2017 and now it is stuck at a little below 5%.”

Irwin discussed reasons why usage of biofuels has hit a plateau.

“The first reason we’re stuck is the non-appearance of cellulosic ethanol since virtually none of the 21 billion gallons that were forecasted has appeared,” he said. “There is a big debate over whether it was never feasible or if the RFS was not implemented in a way that incentivized that production.”

The second reason is the political battle over breaching the E10 blend wall, Irwin said.

“The basic facts about ethanol and biodiesel that’s critical to understand the debate surrounding the E10 blend wall is that ethanol is cheap and biodiesel is expensive,” Irwin said.

“There is an energy penalty for adding ethanol to gasoline, which reflects the fact that ethanol contains about two-thirds of the energy that petroleum gasoline contains,” he said. “The difference in the price of ethanol and gasoline to adjust for the energy difference has averaged 59 cents per gallon since 2012.”

Many people forget when they look at the economic value of ethanol that it is generally an inexpensive source of octane in gasoline blends.

“The difference between the price of ethanol and the price of aromatics, which is the main source of octane from petroleum components in gasoline, on average for ethanol is $1.13 less than aromatics,” Irwin said.

After subtracting 59 cents from $1.13, the net value of ethanol is 54 cents.

“Divide the 54 cents by 10 to get the net impact on a gallon of E10 ethanol,” Irwin said. “Ethanol on average saves U.S. drivers about 5 cents per gallon — that’s why ethanol is cheap.”

Biodiesel

Biodiesel is much different than ethanol.

“Biodiesel is $1.66 more expensive than petroleum diesel,” Irwin said. “Biodiesel is made from fats and oils that have a much higher opportunity cost than corn starch.”

A big question, Irwin said, is what happens to the RFS in 2023.

“The RFS statute does not end in 2022, but the RFS volumes for 2023 and beyond were to be established by late 2021 for the reset in 2023,” he said. “The volumes are to be determined by the EPA in coordination with the Department of Energy and the USDA.”

The expansion of renewable diesel production that is currently happening parallels the construction of ethanol plants from 2004 to 2010, Irwin said.

“One billion gallons of production was added in 2021 and the expansion path projected for the next few years is another 2.2 billion gallons in 2022, 1.9 billion gallons in 2023 and 1.2 billion gallons in 2024,” he said.

This has “enormous implications” for feedstock demand for these plants, Irwin said, if they are all built.

“It takes eight pounds of feedstock to produce a gallon of renewable fuel,” Irwin said.

“If there are 3 billion gallons of renewable diesel capacity that hits the market in late 2022 or early 2023, that will require 24 billion pounds of feedstock,” he said. “That’s equal to the entire U.S. production of soybean oil in a year.”

Not all of the feedstock for renewable diesel is soybean oil. It also includes waste grease, fats, cooking oil and canola oil.

“But soybean oil will probably be at least half,” Irwin said. “I don’t imagine all the plants will be built because it is not clear where the feedstock will come from.”

The increase in renewable diesel production in 2021 has resulted in an “earth-shaking impact” on the relative value of soybean meal and oil, Irwin said.

“The soybean oil is half of the crush value of the soybean when typically it has been one-third so this doesn’t seem sustainable in the long run,” he said.

Electric Vehicles

Electric vehicles also are part of the discussion for biofuels.

Currently in the United States there are about 290 million cars and trucks.

“We sell about 17 million light-duty vehicles in the U.S. annually and now about 2 to 3% of the sales are electrical vehicles,” Irwin said. “It will take decades to have a complete transition to electrical vehicles.”

Therefore, Irwin said, he does not see a big impact on the demand for biofuels in the near or intermediate term.

“We won’t feel much of that for 10 years or maybe 15 years,” he said. “We have a massive fleet of internal combustion engine cars that will turn over fairly slowly.”

Martha Blum

Martha Blum

Field Editor