Robert Rapier: Thoughts on an Ethanol Pipeline

With a present conventional gasoline demand of over 2.1 million barrels per day against ethanol production of 0.8 million barrels per day, it is puzzling that an ethanol pipeline is being discussed. If gasoline demand in the Midwest was converted to demand for E85, every drop of ethanol produced in the Midwest could be consumed in the Midwest instead of using fossil fuels to transport it across the country.

Consider the following thought experiment. Let’s suppose that instead of 2.1 million barrels per day of gasoline, we could convert that demand to E85. Given a fuel efficiency penalty of 25%, it would require 2.1/0.75 = 2.8 million barrels per day of E85 to replace conventional gasoline in the Midwest. That breaks down to 2.4 million bpd of ethanol blended with 0.4 million bpd of gasoline (an 80% reduction in gasoline consumption). To put that into perspective, 2.4 million bpd of ethanol would be an annual demand of 37 billion gallons of ethanol versus the current 12.5 billion produced in the Midwest. Or, to put it another way, if E85 could only reach 34% market penetration in the Midwest, all ethanol produced in the Midwest could be used locally in the Midwest and oil imports could be backed out of the region.

But instead of a strategy in which we try to consume ethanol locally, we are trying to supply a little bit of ethanol all over the country, inefficiently transporting it from the Midwest to coastal states. At the same time, oil imports continue to flow into the Midwest. While most oil imports into the Midwest come from Canada, oil from Venezuela and the Middle East also makes its way into Midwestern gasoline. My view is that instead of exporting ethanol from the Midwest to New York (or even out of the country) we should make sure that E85 dominates the local markets and backs out Venezuelan crude, rendering hollow Chavez’s threats to cut off our crude supplies.

I was asked on a recent radio program about my thoughts on the proposed $4 billion pipeline to transport ethanol to the Northeast states. Because of the arguments I have laid out here, I said that I did not favor that. I think it would make far more sense to push the Midwest — also where much of the country’s food is grown — much further along the path to energy independence.

In fact, a Department of Energy study on the pipeline suggested that it may not even be economically viable:

Study casts doubt on ethanol pipeline

The study’s findings indicate that the ethanol pipeline would need to carry 4.1 billion gallons of corn-based ethanol annually to be feasible without major financial incentives.

That volume is nearly 50 percent higher than the volume for the pipeline being proposed by Poet, the world’s largest producer of ethanol, and Tulsa, Okla.-based Magellan Midstream Partners LP.

Poet and Magellan had been courting support in Congress to amend an alternative energy loan guarantee program that would back up 80 percent of the debt the companies plan to spend installing the ethanol pipeline.

I simply fail to see the logic of spending those kinds of dollars — including taxpayer dollars — to send ethanol outside a region that is still heavily dependent upon gasoline. A mere 10% penetration of E85 into the Midwestern gasoline market would consume even the 4.1 billion gallons mentioned above.

The report further notes:

But according to the DOE report, moving ethanol through the pipeline would cost shippers 28 cents per gallon at projected demand levels, well over the 19 cents per gallon average rate for the rail and barge transportation currently used.

So why not save that 19 (or 28) cents per gallon added costs from shipping it out of the Midwest and make E85 the fuel of choice there? If that strategy were successfully executed, there would be no need for ethanol pipelines or mandates for E15 or E20. The Midwest alone could consume three times the ethanol they currently produce, backing out oil imports into the region and eliminating the fossil fuel consumption from currently shipping ethanol around the country.

consumerenergyreport.com