Billion Gallon Drop in the Bucket
By Bill Moore
Sometimes I can be a little slow on the up-take.
Take the press release I got a week or so ago. It announced that the federal EPA had once and for all denied California's request for exemption from that portion of the Clean Air Act that requires refiners to blend an oxygenate in their fuels to help cut down on smog-forming ozone. Until the state banned it, MTBE was the oxygenate of choice. Then it was discovered that it was leaking into and contaminating the drinking water of thousands of communities in California and elsewhere.
In order to comply with the EPA's oxygenate rule, refiners turned to ethanol, importing 991 million gallons each year; 9 million is "brewed" in California. During both the Davis and Schwarzenegger administrations, the state had petitioned EPA to grant it a waiver on the oxygenate requirement. The recent ruling denying the request is a good thing from the point of view of ethanol industry, in general and the Pacific Ethanol, in particular.
But to my uncomprehending mind, the press release seemed to imply that the EPA decision would be bad for the nascent industry in California. So, when I got a chance to talk with Pacific Ethanol's Bill Jones, I started off by asking him why the EPA ruled against the use of ethanol in the state.
He quickly set me right. The ruling wasn't against ethanol. It was against California's request to not have to use ethanol -- or any oxygenates -- in the gasoline sold in the state. This is a good thing, for the industry and his three year-old company, which currently markets and has its first ethanol plant under construction.
"What [the ruling does] is it really puts behind us this whole debate over a waiver to the oxygenate standard and it moves us to another discussion, which is more important in my opinion, which is the need for renewable fuels to offset imported oil from the Mideast, imported oil that did not generate jobs in California, or other domestic states, imported oil that is really very expensive, and very costly to the consumer", Jones explained to me as we began our interview.
From Jones' perspective, ethanol has everything going for it. It generates domestic jobs, provides a needed economic shot-in-the-arm to the agriculture community, and it keeps money circulating within the country instead of flowing out to foreign oil producers. He noted that the day before our interview, Governor Schwarzenegger announced an ambitious plan to reduce California's greenhouse gas emissions.
"And according to the Pew research group has stated repeatedly that the best way to reduce greenhouse gases is through the use of ethanol".
The EPA ruling is, "a very positive decision, positive for California, and I think it fits in very well with what our governor is intending to do here", Jones stated.
Grain Trains and One Million Dairy Cows
Jones explained that when he looked at producing ethanol in California twenty years ago, it wasn't economical. Today it is, and its the state one million dairy cows that make it feasible.
In order to feed all those animals, over the last decade of system of shuttle trains was established to move grain from the Midwest Cornbelt to California. The grain was then milled into cattle feed.
What is starting to happen now is intriguing. Instead of being milled into feed, the corn is now being processed into ethanol, about 9 million gallons a year of the 1 billion gallons the state uses to oxygenate gasoline.
"All we're doing for the ethanol industry is intercepting this corn, pressing out the ethanol and then continuing to send what is called 'wet distillers grain' to the dairy cows. So they still get the feed. All we do is extract the fuel, so we get multiple uses out of the same product that was coming to California already".
Alternatives Needed to Oil Monopoly
Jones is a firm believer in competition and choice. He sees the oil industry as having a monopoly, one whose grip grows ever-more firm as their wallets grow ticker with windfall profits. He sees a role for all forms of alternatives from hybrid-electric cars to hydrogen and, of course, biofuels like ethanol.
"The economy of this country works the best when there is competition and not monopoly".
At the moment, because of the EPA's oxygenate requirement, ethanol represents 5.7 percent by volume of the gasoline sold in the state. Many other states offer a 10% blend known as E10, or higher. Minnesota is encouraging the sale of E85 in hundreds of its service stations.
Jones notes that while there are hundreds of thousands of vehicles in California that can use E85, there are only a handful of stations that sell it, and worse, most vehicle owners don't know they can use, even if it were available. There is hope, however.
"I see clearly a path that we can go to 10 percent and beyond, because our governor set very aggressive levels for reduction in CO2 greenhouse gas over the next decade or two, and the best way to meet those reductions that he has, appropriately, set out, is to use something other than a hydrocarbon fuel; and the solution that is here today is ethanol".
Jones estimates that if California refiners began blending E10 for sale across the state, it could drop the price of gasoline "a nickel or more". That's because of a recent price drop in ethanol. Whether refiners and retailers would pass along those savings is another question. He also estimates that E85 could go for $1.75 a gallon, including a nice profit for the station, instead of today's $2.75.
He would like to see his state emulate what's being done in Brazil, where 40% of all fuels sold are the equivalent of E20. That may take some revision of California Air Resource Board guidelines, but Jones sees the economic benefits to the state as more than justifying greater use of ethanol, stressing that everyone is wants to preserve the quality of life and the environment in California.
He thinks ethanol is also a natural candidate to be a source of hydrogen for future fuel cell vehicles since it is molecularly rich in hydrogen. It can power today's internal combustion engines -- including envisioned flexible fuel plug-in hybrids -- and tomorrow's fuel cell cars.
The most logical path to get to higher-concentrations of ethanol in motoring fuels is to up the percentage to 10 percent, which he sees as immediately doable today. Establishing an E85 distribution system will take longer, but ultimately, he thinks there's a place for both, especially in a state with tens of millions of automobiles, many already able to use E85 without modification, and for less money. It requires a special permit in California to sell E85, but public awareness and wider availability are more daunting barriers, at the moment, than bureaucratic red tape.
Jones made an interesting observation regarding the perception that ethanol is less expensive than gasoline solely because it enjoys a handsome tax subsidy. He said that if you removed the subsidies for ethanol and gasoline, which itself has received something on the order of $134 billion in federal tax breaks since their inception decades ago, ethanol would still cost less than gasoline does today.
Just as California had to figure out how to incorporate wind power into its electric grid to meet its energy needs, Jones is confident that the state will also figure out how to up the percentage of ethanol in its motor fuels. He see greater use of this renewable fuel over the next twelve months, as a "precursor" to the state's Hydrogen Highway effort.
"I think it's [ethanol] going to be incorporated into the mainstream fuels in this state very similar to what happened years ago in Brazil and other countries".
One of the ways he sees this happening is car dealers who are now selling vehicles like Chevy Tahoes, which are E85 compatible, as a standard feature, will use this as a selling point, especially since E85 costs less than gasoline today. Presumably, this will start to drive demand for this renewable fuel since people will be driven by its lower price.
"At the end of the day, all this process is customer-driven and price-driven. Where there are incentives and the incentives are clear, then the increase in both the consumption of ethanol and additional vehicles, hybrid vehicles..., both will take place".