After a tumultuous 2008 fraught with fluctuating ethanol prices, a credit crunch and volatile corn prices, the ethanol industry faces a new crisis: the "blend wall."
What does this mean? Ethanol production is outpacing demand and running up against a "wall" of how much gasoline companies can blend into the fuel supply. Although the U.S. uses about 140 billion gallons of gasoline annually, federal standards limit the amount of ethanol that can be blended into the fuel supply at 10% of gasoline consumption, or a maximum of 14 billion gallons of ethanol per year.
For a number of reasons, however, ethanol cannot be blended with every single drop of gasoline, making the blend wall actually about 12 billion gallons, according to the Renewable Fuels Association (RFA). The U.S.
ethanol industry is on pace to produce 12 billion gallons by the end of 2009.
"We have been bumping up against this wall, and it's one of the reasons the ethanol industry has had difficult times," says Jeff Broin, CEO of Poet, the nation's largest ethanol producer. "To get ethanol into those final markets, we've had to sell ethanol below its value."
Going forward, the blend wall poses huge problems for cellulosic ethanol production, says Wally Tyner, Purdue University ag economist. He believes ethanol production could level off by 2010 if the barrier remains.
"If there is no increase in the blend wall, my company is not going to continue to invest heavily in cellulosic ethanol, nor will my partners or lenders or equity investors," Broin adds.
Obstacles to break through. Several factors prevent the ethanol industry from breaking through the blend wall, Tyner says. For starters, there are too few cars and trucks capable of running on gasoline with an ethanol blend higher than E10 (10% ethanol blend).
Also, there are only 1,700 fuel pumps in the U.S. that can dispense E85 and most are located in the Midwest.
Some in the ethanol industry have proposed that E10 be replaced by E15 or E20 to increase ethanol use. However, automobile manufacturers do not believe today's E10 vehicles can run on a higher ethanol blend without voiding warranties, Tyner says.
Even so, several recent studies have indicated that higher blends of ethanol, especially E20 and E30, may actually hit the "sweet spot" in terms of fuel economy and engine performance.
Blends of E20 and E30 outperformed gasoline in fuel economy tests for certain automobiles in a study by the American Coalition for Ethanol (www.ethanol.org). Vehicle emissions also met Environmental Protection Agency requirements.