ut

EXHIBIT 2-5: (Continued)
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE
JANUARY 1985

= wi

. if)
>» vee
e~
. eanty — {OG
£ ~
. = 4 :
= we. wy
ors g 3
~ we 1; a &
Or i ,
- we. rowa} : ry
or 3 he,
° i} i
bdo) core
“ ra
° ox
.
amr.
hal en ©
ee on aan
> 4
,
* v8

———

Sto 10% Wa IO to 18% rsa]

Sovreen Aleohot Week and Airohol Outlook, various Ineues,


EXHIBIT 3-3:

THE U.S. PETROLEUM PRODUCT PIPELINE SYSTEM

Source: National Petroleum Council



Where there is no distinction made between standard and sub-octane gasolines, the
discussion should be assumed to apply to both.

Overview

The gasoline distribution system is not a single system optimized either nationally or
regionally. It has developed gradually and consists of many competing and overlapping
parts. Its institutional structure is composed of many companies carrying out both
sequential and parallel operations. It involves complex relationships between major
refiners; independent refiners; resellers such as branded jobbers, commission agents,
and private-branded jobbers; and a variety of types of retail outlets. Exhibit 3-1
illustrates these institutional aspects of the flow of product from refiner to retailer.

The physical transportation system for petroleum products is, like the institutional
structure, a highly complex system. Petroleum products are transported by five modes:
pipelines, ocean vessel, barge, rail tank car, and tank truck (Exhibit 3-2). The methods
for any given shipment are selected to minimize the cost of transportation for the level
of service required.

Pipelines

Pipelines play a large and growing role in the distribution of petroleum products. In the
early 1950's, they accounted for only about 15 percent of petroleum product transporta~
tion.? By the early 1970's, they had reached 40 percent of the total ton-miles. In 1984,
the pipeline market share stood at 57 percent.? The most frequent use of product
pipelines is in shipment of products from the refinery to distribution terminals. In a
few cases, the pipeline may deliver product directly to an end user.4

lpur, Inc., Phase I; Methanol Use Options Study; Volume III, Appendix D, "Transpor-
tation and Distribution of Methanol Fuels." Prepared for the U.S. Department of
Energy, May 1, 1981, p. D-12.

2p, Atkinson, Distribution of Methanol as a Transportation Fuel. Prepared for U.S.
EPA, June 1982, p. 2.

3qyansportation Policy Associates, Transportation in America; Supplement to the 3rd
Edition. Washington, D.C: July 1985, p. ts
4

‘Larie W. Harold, "Distribution Options for Alcohol Fuels," Fuel Alcohol: An Ene
jonal Alcohol nd

Alternative for the 1980's; Appendix. Final Report, U.S. National
Commission; Washington, D.C.: 1981, pp. 768-769.

34


68

Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS

(1984)
QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE (type and amount ) CREDIT QUALIFICATIONS STATUS
Mississippi 10% ethanol 6¢ gallon None Proposed laws
S.B. 2350, 2503, 2505,
2506
Montana ethanol 70€ gallon of available only to in-state Current law (7/1/83)
ethanol producers using Montana-grown | Expires: 4/1/89
50€é (4/1/85) agricultural products
30¢ (4/1/86)
Nebraska 10% ethanol 5¢ gallon available only to agricultural} Current law (6/1/79)
ethyl alcohol produced in Expires: 12/31/92
Nebraska
Nevada 10% ethanol 1¢ gallon None Current law (1981)
No expiration date
New Mexico 10% ethanol Ll¢ gallon Must be produced from New Current law (7/1/80)
(7/1/87) Mexico agricultural products Expires: 6/30/92
8¢ gallon
(7/1/88)
North Carolina| 10% ethanol 5¢ gallon must be produced from Current law (10/1/83)

agricultural or forestry
waste products for full
credit of S¢, until 6/30/85,
Thereafter, all ethanol
qualifies.

Expires: 6/30/92

Herman & Associates


Gasohol is sold at branded and unbranded service stations operated by independent
dealers (lessee and contract), and at branded and unbranded retail] outlets operated by
the fuel supplier, who may be a refiner, a superjobber, or a chain discounter. It is not
sold by ethanol producers, who enter into long or short-term arrangements with gasoline
marketers to provide ethanol at spot prices for blending at the terminal. An estimated
80-100 chain discounters of motor fuel sold an estimated 2.83 billion gallons of ethanol
blends in 1984, 50 percent of total sales of 5.7 billion gallons. By comparison, the same
independent gasoline marketers sold 15.9 billion gallons of gasoline in 1984, roughly 15
percent of total gasoline sales. Thus, gasohol sales represented 17.8 percent of total
gasoline sales by these marketers, three times the national share of 5.5 percent of total
gasoline sales.

Although all of the large integrated and large independent refiners except Exxon
market gasohol to some extent, Texaco, Amoco, Chevron, Sun, Ashland, Mobil, and
Union are more active than others. Their activities are primarily in those states with
tax incentives. Data detailing their gasohol sales are not publicly available.”

Independent gasoline marketers such as the chain discounters discussed above sell a
disproportionate amount of ethanol blend fuels for several reasons. Major brand dealers
and small jobbers do not sell a lot of gasohol because their refiner/suppliers do not
blend ethanol to a significant degree, or encourage ethanol blending. This is because
many major refiners and independent refiners see ethanol as being competitive only if
state tax incentives exist. These refiners fear that the tax breaks will disappear if
gasohol achieves a substantial market share since the cost of the incentives to the
federal and state governments (in the form of reduced tax revenues) grows as the
gasoho] market expands. Consequently, they are unwilling to make the investments
necessary to permit the wide distribution of alcohol fuels through the existing national
Pipeline and terminal system. Furthermore, the widespread marketing of ethanol blends
could result in reduced refinery utilization, a situation which the refiners are not likely
to favor, especially given the high capital cost of a refinery. Consequently, multi-
branded superjobbers and chain discounters do the majority of blending. These

lemarks by Kenneth A. Doyle, Executive Director of the Society of Independent
Gasoline Marketers of America (SIGMA) before the Renewable Fuels Association, 1985
Conference on Alcohol Fuels, September 19, 1985, Washington, D.C.

2 Personal Communication with Eric Vaughn, President, Renewable Fuels Association,
October 10, 1985.

43


40 million galions more may have entered the country for fuel purposes without paying
the tariff.) For example, importers may legally avoid the tariff by blending the ethanol
with gasoline to make gasohol and importing the gasohol, in which case the only duty
levied is the 1.25 cents per gallon duty on imported gasoline.” The tariff may also be
avoided by blending imported fuel ethanol with 6 or 7 percent of another
octane-boosting component of gasoline, such as toluene or xylene, and paying a duty on
the shipment as though it were toluene or xylene instead of ethanol.? Pure fuel ethanol
may also be imported duty-free into the United States if the ethanol has been upgraded
from 190 proof ethanol to fuel grade ethanol in a country covered by the Caribbean
Basin Initiative. Congressional action could possibly remove this last loophole within

a year.4

2.2 DEMAND

Consumption of fuel ethanol has increased greatly in recent years, from 20 milion
gallons in 1979 to 570 million gallons in 1984. By 1984, fuels uses accounted for 73
percent of all nonbeverage ethanol consumption.® (Beverage ethanol is not considered
further here because of different product quality and regulatory requirements which
create a separate market for beverage ethanol.) Major nonfuel, nonbeverage uses
include applications as a solvent and as a chemical feedstock. However, since solvent
demand has been relatively stable, and feedstock demand has been declining in recent
years, fuel demand for ethanol accounts for all of the recent growth in total ethanol
demana.® Nonbeverage ethanol consumption since 1979 is detailed by use in Exhibit 2-4.
(Fuel ethanol demand in Exhibit 2-4 does not match fuel ethanol supply in Exhibit 2-1
due to changes in inventories and the inexact nature of the import statistics.) Total
fuel ethanol demand and factors influencing it are described below.

Aninternational Alcohol Outlook," op. cit., p. 14.

20.8, Firm Seeking to Import Ethanol Through Foreign Trade Zone," Alcohol Update,
May 27, 1985, p. 1.

3Sohn Gordley, member of Senator Dole's Staff, personal communication, August 12,
1985.

4ncustoms Refuses to Immediately Revoke CBI Rulings," Alcohol Update, May 6, 1985,

p. 1,

Si gdion R. Segal, "Gasohol: The Alcohol Fuels." Prepared for Congressional Research
Service, July 12, 1985, p.6.

Smomas F. Killlea, Chemical Economics Handbook, op. cit., p. 644.5023L.

11


e Alternative A is a terminal blending scenario for 5 percent blends where
it is assumed that ethanol demand equals that for 10 percent blending.
This means that twice as much gasohol is sold.

e Alternative Bis a refinery blending scenario for 5 percent blends where it
is assumed that ethanol demand equals that for 10 percent blending.

The assumptions relating to batch minimums, shipment frequency, transportation costs
by mode, and pipeline availability presented in Chapter 4 also apply to these scenarios.

As can be seen in Exhibits 5-1 to 5-4, several factors jointly determine the effect which
volatility controls requiring 5 percent ethanol blends will have on transportation costs.
As in the case of controlling the volatility of 10 percent ethanol blends, these include
transportation mode, shipment distance, volume of shipment, destination of shipment,
and point of blending. Implementation of special blending requirements necessitating
the production of 5 percent ethanol blends can affect each of these factors and thus
affect transportation costs and the delivered cost of gasohol.

As with 10 percent blends, of importance in terminal blending is whether the use of
special gasoline will require a more expensive transportation mode to deliver the
specially blended gasoline to the terminal blending point. Similarly, with refinery
blending, transportation costs could increase if the gasohol shipped from the refinery
must be shipped by a more expensive mode than was gasoline. If the ethanol producer is
able to realize economies of scale in transportation costs by shipping to one point (a
refinery) rather than to multiple points (terminals), however, total transportation costs
could fall.

Two additional factors will affect transportation costs if 5 percent ethanol blends are
required. First, reducing the ethanol content of gasohol blends to 5 percent to control
mid-range volatility reduces the total transportation cost per gallon of gasohol because
ethanol transportation costs are substantially higher than gasoline transportation costs.
Second, if ethanol blend demand doubles, more than twice as much specially blended
gasoline will be required than in 10 percent blending; and changes in gasoline
transportation mode and increases in transportation cost will be less likely to occur
than in the 10 percent case.

The maximum increase in transportation costs due to terminal blending of 5 percent
blends can be estimated if it is assumed that:

71


For refiners currently using tank trucks to transport gasoline to the distribution
terminal, the requirement for special blending of gasoline to be combined with ethanol
should have no impact. The minimum batch size for trucks ranges from 1,000 to 8,000
gallons. Assuming monthly shipments, gasohol demand in the terminal area would have
to exceed 13,000 to 107,000 gallons per year. In 1984, the smallest gasohol demand
listed for any state with gasohol sales was 16,000 gallons in Georgia, with the second
smallest being 63,000 gallons in the District of Columbia. Thus, it is unlikely that tank
truck shipments to any area would become infeasible.

Effects on Transportation Mode Assuming Refinery Blending

Refinery blending of gasohol may affect the mode used by an ethanol producer to
transport fuel ethanol if the ethanol producer can combine shipments of ethanol that
once traveled to numerous locations into a shipment to a single destination. By
combining shipments, the ethanol producer may be able to shift from truck or rail to

more economical barge or unit train transportation.!

Changes in the modal choice of the refiner will be observed only if the refiner
previously used pipeline transportation. Although transportation of gasohol by pipeline
has been shown to be technically feasible, it is not expected that gasohol will be
transported by pipeline unless demand for gasohol increases substantially and appears to
have a long-term market that justifies the required capital investment. Blended
gasohol will be transported, therefore, by a mode other than pipeline, possibly barge
where available. In any case, if the gasoline it replaces was transported from the
refinery to the terminal by any mode other than pipeline, the gasohol can be expected
to move by the same mode.

4.3 TRANSPORTATION COSTS

Any shift in transportation mode or destination for ethanol, gasoline, or gasohol has
implications for the cost of delivering gasohol to the consumer. Shifting gasoline from
pipeline to barge would increase transportation costs by 0.07¢ per gallon per 100 miles,
an increase of about 30 percent. Shifting gasoline from pipeline to truck would have far
greater impacts: truck transportation would cost an average of 0.94¢ per gallon per 100
miles more than pipeline transportation — almost 5 times the pipeline cost.

14 unit train is a freight train with 100 or more cars carrying a single commodity. Unit
train freight rates are lower than rates for a single tank car.

53


terminal by the low cost pipeline method presently being used for other gasoline,
whereas if gasohol were blended at the refinery, volumes are not large enough to justify
the investment and operating costs involved in preparing and maintaining pipelines for
fuel containing alcohol.

4.2 TRANSPORTATION MODES

In most areas of the country, about 50 percent of fuel ethanol is shipped to the
distribution facility by rail and 50 percent by truck. Along the nation’s navigable
waterways, primarily in the Midwest, barge transportation may account for 50 to
80 percent of distribution, with the remainder divided evenly between truck and rail.
Gasoline for splash blending typically meets the ethanol at the same or a nearby
terminal after being transported there by pipeline, barge, or in some areas, truck.
Pipeline transportation is concentrated in the South Central states, the Midwest, and
the Northeast. Barges are primarily used on the Mississippi, Missouri, and Ohio Rivers,
as well as on intracoastal waterways. Trucks tend to be relied upon for transportation
of gasoline in the West where neither pipelines nor water transportation are available.
In all locations, the blended gasohol is shipped primarily by truck from the terminal to
the station.

A requirement that gasoline be specially blended for mixing with ethanol could affect
the transportation modes used to move gasoline, ethanol, and gasohol. The first step in
the analysis of such changes is identification of the likely blending point for the fuel.
Since it was concluded in the previous section that terminal blending would probably
continue to dominate the industry, one of the scenarios considered here assumes
terminal blending. Since it is also likely that some blending will be shifted to
refineries, a scenario based on refinery blending is also considered. The effects on
transportation mode choice of service station blending are not evaluated because it is
expected to be a very small portion of the market.

Effects on Transportation Mode Assuming Terminal Blending

With terminal blending, the transportation mode used to move ethanol from the
producer to the terminal will not be affected if special blending requirements are
instituted. The mode used to transport gasohol from the terminal to the service station
will also be unaffected. It is only the transportation of gasoline from the refinery to

51


EXHIBIT 4-3:
SCENARIO 3

Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles
Terminal Demand for Gasohol = 20,000 barrels per month

Base Case:

Alternative A:

Alternative B:

Terminal Blending of Gasohol with Standard Gasolines

Transportation of Gasoline from Refinery to Terminal by Pipeline

Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates

Transportation Cost:
Gasoline: 1.2¢ per gallon; $9,072 for 18000 barrels
Ethanol: 5.025¢ per gallon; $4,221 for 2,000 barrels
Total: $13,293

Terminal Blending of Gasohol with Specially Blended Gasoline

Transportation of Gasoline from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Rail and Truck Rates

Transportation Cost:
Gasoline: 1.55¢ per gallon, $11,718 for 18,000 barrels
Ethanol: 5.025¢ per gallon, $4,221 for 2,000 barrels
Total: $15,939

Impact: Cost Increase of $2,646 Over Base Case

Comment: Transportation costs increase because special
blend volume is not sufficient to move by
pipeline: must be moved by barge, a more
expensive mode.

Refinery Blending of Gasohol with Specially Blended Gasoline

Transportation of Gasohol from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Refinery by
Barge

Transportation Costs:
Ethanol: 3.00¢ per gallon; $2,520 for 2,000 barrels
Gasohol: 1.55¢ per gallon; $13,020 for 20,000 barrels
Total: $15,540

Impact: Cost Increase of $2,247 Over Base Case, but
Cost Savings of $399 Over Alternative A.

Comment: Transportation costs increase in comparison to
the Base Case because gasohol must travel by
@ more expensive mode, barge, than gasoline.
The increase here is greater than the cost
savings realized in the transportation of
ethanol, which are due to the consolidation of
shipments permitting use of a less expensive
mode.

57


transaction costs, if all refiners who provided gasoline previously blended with ethanol
also provide the special gasoline to be blended at the terminals; and if all terminals
previously blending ethanol continue to blend ethanol. If some refiners do not provide
special gasoline, or if some terminals no longer blend ethanol, transaction costs could
increase, assuming that terminals and gasohol retailers previously had a least cost
supply relationship with a refiner and a terminal, respectively.

Transaction cost savings could occur with refinery blending if ethanol suppliers are able
to negotiate delivery contracts with fewer refiners than terminals. These cost savings,
however, could be offset by transaction cost increases if gasohol is not produced by
every refiner and if it is not supplied to every terminal previously involved in ethanol
blending.

4.5 STORAGE AND EQUIPMENT ISSUES

Since the volume of liquid product moved in the distribution system will remain
constant if special blending is required, it is not expected that major investments will
be needed in storage capacity or transportation equipment beyond those currently
planned between 1985 and 1990. Some modifications may be necessary in this capital
stock, however, to reduce technical problems in distribution. The construction of
barges and rail and truck tankers should present no problem to the distribution of
ethanol or gasohol, although improved seals may be needed to minimize water ingress.
In bulk storage, floating roof tanks with improved seals will be needed to minimize
water ingress. This type of tank, however, has become widespread in use in the past ten

years, 1

Similarly, tanks suitable for the storage of ethanol and/or gasohol but not previously
used for that purpose may need to be cleaned or upgraded before they are put into
service. Tanks used to store petroleum products are likely to contain sediment and
water. To prevent contamination and subsequent phase separation of the gasohol blend,
these must be removed prior to using the tanks for alcohol fuel storage. Costs will thus
be incurred if the number of tanks containing gasohol or ethanol increases beyond the
number used when blending with standard gasoline. This may occur if special blending
requirements eliminate the current predominant practice of blending the gasohol as it is
placed into a distribution vehicle such as a tank truck.

latkinson, op. cit., p. 17.
61


could in the long-term be transported by pipeline, the lowest cost fuel transportation
mode available. However, as discussed in Section 3.2, while pipeline transportation
has been determined in tests by Amoco and others to be technologically feasible,
current demand levels do not justify the expenses associated with preparing and

monitoring a pipeline for alcohol fuels.

There are also several disadvantages to refinery blending. Gasohol is more susceptible
than gasoline to degradation during movement from the refinery through contamination
with water or sediment.” This is particularly true when refinery blending tanks, which
normally have only floating roofs that allow some entry of rainwater, are used as
storage tanks.? Thus, there is an incentive to make the blend later in the distribution
chain when water or sediment intrusion into the solvent-like gasohol (and subsequent
phase separation) are less likely.4

Storage Terminal Blending

An alternate blending site for gasohol is the storage terminal. Blending at the terminal
would involve reduced risk of phase separation compared with refinery blending because
the risk of water ingress into storage depot tanks, which are normally fixed roof tanks,
should be lower than with the floating roof tanks found at refineries.® Furthermore,
storage depots, which have performed most of the blending to date, are already
equipped to handle and store ethanol. Finally, in many areas the volume of gasohol
consumed is great enough that refiners could still use their current transportation
modes, including pipelines, to move a specially blended gasoline to the terminal.
Section 3.1 details the recent Williams Brothers Pipe Line agreement to transport

specially blended gasolines,®

There are also some potential disadvantages to terminal blending. Their importance
depends on the testing requirements for the fuel. Gasoline refiners presently subject
their fuels to constant laboratory testing at the refinery to achieve a consistent
product. If either EPA or the refiner requires that the gasoline be tested after being
combined with the ethanol, rather than solely at the refinery, there will be significant
costs associated with purchasing testing equipment and staffing the facility with quality

lingustry information obtained through interviews with pipeline companies.
2Harold, op. cit., p. 778.

3 Hooks, op. eit., p. 1-32.

4Harold, op. cit., p. 778.

SHooks, op. eit., pp. 11-31 and 11-32.

Snaustry information based on interviews with refiners and pipeline companies,

49


EXHIBIT 2-8:
GASOLINE OCTANE IMPROVEMENT COSTS

Cost, Cents Per Octane Number-Barrel

Unleaded Unleaded Leaded
Component Volume Percent Regular Premium Regular
Tetraethy! Lead! _ — — 5
MMT? — — _ 25
Processing
Low Severity _ _ _ 20
Typical Severity ~ — — 26
High Severity _ _ _ 32
Toluene ($1.19/gal.)° 4.0 55.1 60.9 49.9
Tertiary Butyl Aleohol 16.0 81.2 114.2 66.1
(1.00/eal. 8.0 88.2 125.5 72.0
Methyl Tertiary Bugyl Ether 11.0 53.7 58.3 49.6
($1.19./gal. 4.0 58.1 62.6 53.8
Oxino! 504 9.6 5.4 0.0 9.7
(70¢/gal.) 4.8 31.0 30.6 37.3
Ethanol ($1.63/gal.)? 10.0 143.9 164.5 186.9
with 5¢/gal. gasohol subsidy 10.0 68.4 75.1 91.0
with 10¢/gal. gasohol subsidy 10.0 -7.2 -14.3 ~4.9
with no gasohol subsidy 5.0 161.1 180.6 214.3

l average response, 1.1 grams per leaded gallon.

2 methyleyelopentadienyl manganese tricarbonyl, used in concentractions of 0.01 to 0.05 grams per
gram lead in gasoline, typical response.

3 costs for toluene, MTBE and ethanol have been adjusted to reflect current prices.
4oxinol 50 is 50 percent methanol, 50 percent tertiary butyl alcohol.

Sources: G.H. Unzelman, "Problems Hinder Full Use of Oxygenates in Fuel," Oil and Gas
Journal, July 2, 1984 and Mueller Associates, Inc., Gasoline Octane Enhancement:

Technol Economies and Environmental, Health and Safety Considerations, July
1985, pp. ar V-24. Current prices from Alcohol Outlook, May 1965, Pp. z, and

Alcohol Week, June 24, 1985, p. 13.

21


Water Transportation

Water transportation, where available, provides a low cost method of delivering fuel
when pipeline movement is not feasible. Waterborne vessels transport petroleum
products both on oceans and the nation's 25,000 miles of inland waterways, with the
latter concentrated in the Great Lakes region, along the Ohio and Mississippi Rivers and
parallel to the Atlantic and Gulf Coasts (Exhibit 3-4). Movements ranging from less
than 10 miles to over a thousand miles can be economical. Self-propelled tankers are
used in coastal and ocean transportation. Tank barges are used for inland transpor-
tation. Both are currently used extensively for petroleum product transportation.” In
1984, water carriers accounted for 35 percent of the transportation ton-miles for

petroleum produets.?

Tank trucks are commonly used for loca) distribution of petroleum products and are
best suited for use in distances of less than 150 miles. Their most common use in the
gasoline distribution system is in transporting fuel from the terminal, or possibly the
refinery, to the end user. Trucks are also occasionally used in longer hauls in areas of
the country where pipeline and barge transportation are not available.4

Truck shipments of petroleum products account for only a small portion of the total
transportation ton-miles, about 6 percent in 1984.° This measure severely understates
the importance of this mode to gasoline and petroleum product transportation however.
Virtually all gasoline is at some point transported by truck.®

Rail Tank Cars

Rail movement, once an important mode of transportation for refined petroleum
produets,” now accounts for less than 0.2 percent of all gasoline tonnage transported.®

DHR, Inc., op. cit., p. D-12.

Atkinson, op. cit., pp. 6, 8.

Transportation Policy Associates, op. cit., p. 13.
Harold, op. cit., pp. 768-769.

5qransportation Policy Associates, op. eit., p. 13.
8 atkinson, op. cit., pp. 8, 10.

T Harold, op. eit., p. 769.

8u,s. Department of Transportation, 1981 Carload Waybill Statistics: Territorial
Distribution, Traffic, and Revenue by Commodities Classes, February 1983, pp.
137-138.

1
2
3
4

39


EXHIBIT 5-4:
SCENARIO 4

Distance from Refinery to Terminal = 50 miles
Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles

Base Case:

Alternative A:

Alternative B:

Terminal Blending of 10 Percent Ethanol with Standard Gasoline
Ethanol Blend Demand = 20,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethano) from Ethanol Plant to Terminal by Truck

Transportation Costs:
Gasoline: 0.155¢ per gallon; $1,172 for 18,000 barrels
Ethanol: 2.94¢ per gallon; $2,470 for 2,000 barrels
Total: $3,642 for 20,000 barrels
Average: 0.43¢ per gallon

Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 40,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Terminal by Truck

Transportation Costs:
Gasoline: 0.155¢ per gallon; $2,474 for 38,000 barrels
Ethanol: 2.94¢ per gallon; $2,470 for 2,000 barrels
Total: $4,944 for 40,000 barrels
Average: 0.29¢ per gallon

Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case becuase the
proportion of gasoline in the blend increases,
and gasoline costs less to deliver than ethanol.
No change in modes.

Refinery Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 40,000 barrels per month

Transportation of Gasohol from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Refinery by Truck

Transportation Costs:
Gasohol: 0.155¢ per gallon; $2,604 for 40,000 barrels
Ethanol: 1.47¢ per gallon; $1,235 for 2,000 barrels
Total: $3,839 for 40,000 barrels
Average: 0.23¢ per gallon

Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case and Alternative
A because ethanol is shipped a shorter
distance to the refinery than to the terminal
by the same mode (truck), and because gasohol
is shipped by the same mode as standard
gasoline (barge).

70


unchanged.) Furthermore, in the distribution scenarios presented in Chapters 4 and 5,
there is an implicit assumption that each refiner whose product is currently blended
with ethanol will produce the special gasoline blends; and that the specially blended
gasoline is mixed with the ethanol of the same producer and shipped to the same
terminals as was the case without special blending. An analysis of the effects on fuel
distribution systems of the change in blending practices that considers potential
changes in demand for gasohol and in relationships among ethanol and gasoline suppliers
and terminal operators is recommended as a means of refining the study. However,
important conclusions about potential changes in ethanol, gasoline, and gasohol distri-
bution systems can be drawn based on the current analysis.

The 10 percent ethanol blend analysis shows that requiring the use of specially blended
gasoline for ethanol blending could increase the cost of delivering gasohol if terminal
blending continues. Transportation costs increase if the specially blended gasoline must
be shipped to the terminal using a transportation mode other than the mode used to
transport the standard gasoline previously blended with ethanol. This would happen if
the volume of specially blended gasoline did not meet the minimum batch requirement
for the latter mode, The maximum cost increase is estimated to be 0.82 cents per
gallon of gasohol for every 100 miles that the special gasoline is shipped to the
terminal. If refinery blending occurs and the gasohol is transported to the terminal by
the same mode as the previously used standard gasoline, transportation cost savings
could occur if the ethanol plant is much closer to the refinery than the terminal and/or
if the ethanol producer can realize sufficient transportation cost scale economies by
consolidating shipments. If, however, the gasohol is transported by a different mode (as
would be the case if a pipeline had transported the standard gasoline), gasohol
transportation costs could increase by as much as 0.91 cents per gallon per 100 miles,
less any cost savings in ethanol transport. Since it is probable that terminal blending of
gasohol will dominate refinery blending in 1990, total transportation costs will increase
by no more than 0.82 cents per gallon of gasohol for every 100 miles that the special
gasoline is shipped to the terminal.

The 5 percent ethanol blend analysis also shows that requiring the use of specially
blended gasoline for ethanol blending could increase the cost of delivering gasohol if
terminal blending continues. Transportation costs increase if the specially blended
gasoline must be shipped to the terminal using a transportation mode other than the
mode used to transport the standard gasoline previously blended with ethanol, The


every 100 miles that it is shipped. This cost increase, however, may be offset partially
or totally if the ethanol plant is much closer to the refinery than to the terminal; or if
the ethanol producer is able to realize reduced transportation costs by consolidating
shipments and by shipping to the refinery rather than to several terminals. The net
result will depend upon the individual circumstance.

Exhibit 5-5 presents the average transportation cost per gallon of gasohol (either a 5
Percent blend or a 10 percent biend) delivered at the terminal for each scenario and
alternative examined in Chapters 4 and 5. Analysis of the results for comparable
alternatives indicates that, for both terminal blending and refinery blending, a 5
percent alternative offers the smallest cost increase or largest cost decrease in
comparison to the base case. This is because reducing the ethanol content of blends
replaces relatively expensive to transport ethanol with gasoline; and because larger
quantities of specially blended gasoline and gasohol are assumed to move through the
distribution system for 5 percent blends than for 10 percent blends, reducing the
likelihood that mode changes will be required for transporting these products. If,
however, ethanol demand falls because sales of ethanol blends do not at least double, it
is possible that modal changes will be required and that the total transportation cost
impact could be more severe than with a 10 percent blend. Consequently, it is not
possible to conclude that in all circumstances the transportation cost impact of
requiring 5 percent ethanol blends to control gasohol volatility will be less than that for
10 percent blends. Generally, however, 5 percent blends offer greater opportunities for
controlling transportation costs in the event of volatility controls.

5.4 EFFECTS ON MARKET RELATIONSHIPS AND TRANSACTION COSTS

Terminal blending of special gasoline with ethanol will not affect existing business
relationships in the ethanol/gasohol distribution system, and therefore should not affect
transaction costs, if all refiners who provided gasoline previously blended with ethanol
also provide the special gasoline to be blended at the terminals; and if all terminals
previously blending ethanol continue to blend ethanol. If some refiners do not provide
special gasoline, or if some terminals no longer blend ethanol, transaction costs could
increase, assuming that terminals and gaschol retailers previously had a least cost
supply relationship with a refiner and a terminal, respectively.

Transaction cost savings could occur with refinery blending if ethanol suppliers are able
to negotiate delivery contracts with fewer refiners than terminals. These cost savings,

73


e the existing ethanol and gasoline supply relationships continue to exist if 5
percent blends are required;

° all special gasoline is shipped to the terminal by truck;

e the gasoline which would have been blended with ethanol to produce a 5
percent blend in the absence of volatility controls would have been
shipped to the termina] by pipelne and barge in proportions equa] to those
shown in Exhibit 3-2 for 1984 (62 percent of ton-miles by pipeline, 38
percent by barge); and

e the ethanol is transported an average of 200 miles by barge to the
terminal.

Given the gasoline transportation costs presented in Chapter 4, gasoline transportation
costs increase with terminal blending by 0.94 cents/gallon per 100 miles if the mode
changes from pipeline to truck; and by 0.87 cents/gallon per 100 miles if the mode
changes from barge to truck. The maximum average cost increase per gallon of
gasoline per 100 miles, therefore, is 0.913 cents (equal to (0.94X0.62) + (0.87(0.38)).
Since gasoline constitutes 95 percent of the gasoline/ethanol blend, the delivered cost
of the gasohol at the terminal will increase by a maximum of 0.87 cents/gallon for
every 100 miles that the special gasoline is shipped to the terminal. The total cost
increase, however, will be slightly less than this amount since the ethanol transpor-
tation cost component of the gasohol will at a minimum be reduced from 0.15 cents per
gallon of gasohol (10 percent of the cost of transporting a gallon of ethanol 200 miles to
the terminal by barge) to 0.075 cents per gallon of gasohol (5 percent of the ethanol
transportation cost), a saving of 0.075 cents per galion. The maximum cost increase is
less likely to occur than in the case of terminal blending of 10 percent blends, however,
because modal changes are less likely to occur if 5 percent blends are required.

In the case of refinery blending of 5 percent blends, the cost of delivering gasohol to
the terminal will rise if the gasoline previously blended with ethanol was transported by
pipeline, or if shipping the gasohol requires a more expensive mode than for gasoline.
Again assuming that the gasoline shipped to terminals for blending was shipped by
pipeline and barge in proportions equal to those shown in Exhibit 3-2 for 1984 (62
percent and 38 percent, respectively), and that the gasohol blended at the refineries is
shipped by truck, the maximum cost increase will be 0.91 cents/gallon of gasohol for

12


however, could be offset by transaction cost increases if gasohol is not produced by
every refiner and if it is not supplied to every terminal previously involved in ethano!
blending.

5.5 STORAGE AND EQUIPMENT ISSUES

Controlling the mid-range volatility of gasohol by requiring 5 percent ethanol blends
probably will not necessitate major investments in storage capacity or transportation
equipment since the volume of quid product moved by the distribution system will
remain constant. As with 10 percent blends, some modifications may be necessary in
the capital stock to reduce technical problems in distribution. For example, improved
seals may be needed to reduce water ingress in storage and distribution tanks, and
receptacles suitable for storage of ethanol and/or gasohol but not previously used for
that purpose may need to be cleaned or upgraded before they are put into service.
Thus, costs will be incurred if the stock of tanks and transport equipment used to store
and ship gasohol or ethanol increases beyond that used when blending with standard
gasoline. This will certainly occur if the requirement for 5 percent blends results in an
increase in the number of gallons of gasohol produced, and may occur even if gasohol
production stays constant but refinery blending becomes prevalent.

Although it is anticipated that additional transportation stock will not be needed, it is
Possible that the usage patterns of the available stock will change. This is less likely to
oceur for 5 percent blends than for 10 percent blends when ethanol demand is constant
because the production of larger volumes of specially blended gasoline and gasohol will
reduce the probability of a need for modal change (except in the instance of pipeline
transportation of gasoline and refinery blending of gasohol).

15


Elimination of the federal tax incentives for alcohol fuels would have serious conse-
quences for the domestic fuel ethanol industry, since gasohol could not currently
Compete with gasoline without the federal! subsidy. Extension of the energy investment
tax credit would have the effect of encouraging continued growth of domestic fuel
ethanol production capacity. Legislation which would strengthen the fuel ethanol
import duty laws would provide a greater deterrent to fuel ethanol imports, and thus
encourage the development of domestic capacity. Such legislation includes a 60 cents
per gallon tariff on gasohol imports, which are not currently subject to the 60 cents per
gallon fuel ethanol tariff; a bill closing the loophole for wet ethanol upgraded to fuel
ethanol in the Caribbean, presently exempt from duties under the Caribbean Basin
Initiative; a fuel ethanol duty imposed on allimported ethanol, followed by remission of
the duty to an end user of ethanol who could verify that the ethanol was used for
nonfuel purposes; and closure of the loophole for imported ethanol blended with another
octane enhancer, such as toluene or xylene, to avoid the tariff.

In the state legislatures, South Carolina, New Jersey and Maine have passed excise tax
exemptions which took effect between October 1, 1985 and January 1, 1986. These
exemptions will be 6 cents per gallon, 8 cents per gallon and 4 cents per gallon
respectively. California is currently considering a 2 cent per gallon gasohol excise tax
exemption on gasohol, and Dlinois is currently considering a bill to reduce the state
sales tax exemption by one percent for every cent increase in the federal excise tax
exemption.”

_ Ethanol Research

Currently, research is being conducted to develop an economically competitive process
technology for the production of ethanol from cellulosic materials, such as wood. Work
is also being done to develop new strains of yeast which could increase ethanol yields
from fermentation by 30 to 40 pereent.? The economic analysis in this report assumed
no major breakthrough would occur in ethanol production technology in the next five
years. A breakthrough in either of these areas is unlikely to result in production scale
units in that time frame, but if such a breakthrough were to occur it could dramatically
lower the price of domestic fuel ethanol and increase demand for ethanol as a gasoline
additive.

Terman and Associates, op. cit.
*HState Tax and Regulation Update," Alcohol Update, July 1, 1985, p. 10,

Sottice of Alcohol Fuels, U.S. Department of Energy, Annual Report to the President
and the Congress, December 1984, p. 2

32


EXHIBIT 2-6:
1984 GASOHOL SALES BY STATE

(thousand gallons)
Gasohol
Market Share,
State Gasohol Sales Gasoline Sales Percent
Alabama 34,899 1,714,466 2.0
Arkansas 28,871 1,131,879 2.8
California 401, 837 11,543,991 3.5
Colorado 62,371 1,564,085 4.0
Connecticut 5,421 1,324,617 0.4
District of Columbia 63 154,440 —_—
Florida 508,751 4,990,063 10.2
Georgia 16 2,817,217 _
Idaho 6,658 411,438 1.6
Diinois 263,127 4,171,725 6.3
Indiana 483,063 2,394,052 20.2
lowa 457,228 1,421,217 32.2
Kansas 249,296 2,150,118 11.6
Kentucky 328, 238 1,595,852 20.6
Louisiana 24,424 2,152,204 1.1
Maryland 82 1,785,164 —_
Michigan 577,723 3,954,285 14.6
Minnesota 2,707 2,406,645 0.1
Montana 8,303 505,144 1.6
Nebraska 208,455 730,783 28.5
New Mexico 56,494 804,118 7.0
North Carolina 34,037 2,958,509 1,2
North Dakota 5,469 424,937 1.3
Ohio 399,988 4,497,646 8.9
Oklahoma 23,620 1,822,717 1.3
Oregon 298 1,299,318 _
South Carolina 154 1,485,242 _
South Dakota 37,850 381,163 9.9
Tennessee 109, 762 2,623,163 4.2
Texas 207,152 10,455,038 2.0
Utah 25,862 703,798 3.7
Virginia 131,618 2,454,065 5.4
Washington 9,143 1,944,823 0.5
Wisconsin 1,962 1,996,435 Q.1
Wyoming 288 300,638 0.1
Toraut 4,695,230 83,073,000 5.7

fa

‘Total does not include 15 states where gasohol is taxed at the same rate as gasoline and
gasohol data are not available separate from gasoline data.

Sources: Gasohol sales from Office of Alcohol Fuels, U.S. Department of Enengy, Sixth
Annual Report on the Use of Alcohol in Fuels, April 1985, p. 6. Gasoline Sales
from ergy ormation Administration, Petroleum Marketing Monthly,
January 1984 through December 1984,

18


EXHIBIT 2-10:

STATE TAX INCENTIVES FOR ALCOHOL BLENDED MOTOR FUELS!

}oammmne e,

ae

\

st
R

wowa

| Additional information is provided in Appendix A.
* Not yet in effect.
Source: Herman and Associates. July 1995.

vous

0
em

Crp,
.° Ore,

e*

we ‘ e
z 3
.
: we “
nu \s oy
1é (eo. ono
3
21.4
mo. az | 154
«.
3.
al
"AAA, ae
ry aw | *
oz “
wu.
164
"State

Tex Incent ivea|
for Alcohol
Blended Fuels

ac

“ot

2


EXHIBIT 2-7:
COMPANIES WHICH PRODUCE, EXCHANGE OR SHIP SUB-OCTANE GASOLINE
WHICH CAN BE BLENDED WITH ETHANOL

Pipeline Companies Number Of
Refiner/Marketer Terminals With Ethanol

Amoco
Amber
Apex

Ashland 1

Buckeye Pipeline
Derby

e
cs

Indiana Farm Bureau
Koch Refining

La Gloria

Mobil

Rock Island
Southland/Citgo

Sun Refining
Texaco

Total Petroleum
Triangle

Unoeal

Williams Pipeline Co.
Wolvering Pipeline

OnraIroOnrwow nk re OF Dv

on

Source: Archer Daniels Midland, ADM Ethanol.

20


CHAPTER 3

ETHANOL DISTRIBUTION AND BLENDING

This distribution system for ethanol has three components:

e distribution of gasoline to be blended with ethanol, from the refinery to
the blender;

e distribution of ethanol to be blended with gasoline, from the producer to
the blender; and

° distribution of gasohol, from the blender to the retailer.

The following pages describe each of these aspects of the ethanol distribution system,
focusing on the characteristics of each that could be affected by gasohol special
blending requirements and/or a reduction in the ethanol composition of gasohol from 10
percent to 5 percent. The patterns of distribution described here, and their costs, serve
as the basis for the analyses of proposed changes in ethanol blending practices
presented in Chapters 4 and 5.

3.1 THE GASOLINE DISTRIBUTION SYSTEM

Gasoline is blended with ethanol in two forms. Standard gasolines that could be sold as
finished product are the most common (75 to 80 percent of the gasoline blended with
ethanol). When blended with ethanol, the resulting gasohol has a higher octane rating
than the standard gasoline, and with federal and state tax incentives, may have a lower
cost. The second type of gasoline blended with ethanol is the specially produced sub-
octane blend. Sub-octane blends of gasoline are blends that, when mixed with the
higher octane ethanol in a 9:1 ratio, result in motor fuels with standard octane ratings,
such as 87 octane regular unleaded and 88 octane regular leaded. The distribution
system for standard gasolines blended with ethanol is believed to be essentially identical
to that for gasolines not blended with ethanol. The distribution system for sub-octane
blends differs somewhat because they have not, until recently, been transported by
pipeline. An overview of the distribution systems for both forms of gasoline follows.

33


ST

EXHIBIT 2-5: (Continued)
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE

pace

craw *

JANUARY 1983

XRT
Niet

2to 5% =

Sto 10% WZ 18 to 25% revel



18

Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS

(1984)
QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE (type and amount) CREDIT QUALIFICATIONS STATUS
Hawaii 102 ethanol 4é gallon must be produced or Current law
manufactured in Hawaii Expires: 1992
from biomass
Idaho 10% ethanol 4¢ gallon must be produced, Current_law (5/1/81)
manufactured or blended Expires: 4/30/86
in Idaho
Illinois 10% ethanol 4% gallon sales tax exemption only Current law (12/1/83)
Expires: 1992
Indiana 10% ethanol 3% gallon effictive 7/1/84, some funds Current law
exemption collected from the motor fuel | Expires: 7/1/85
(to 6/30/84) | tax will be earmarked for
2.5% gallon Indiana “ethanol fuel produc-
(7/1/84 to tion in incentive grants”
6/30/85)
gross re- disbursement of accumulated
tail tax) funds will begin 7/1/85
Towa 10% ethanol 3¢ gallon None Current law (7/1/78)
Expires: 6/30/86
Kansas 10% ethanol 5é gallon U.S. agricultural products Current law (7/1/82)
distilled in the U.S. (H.B. 3070 would
modify)

Herman & Associates



EXHIBIT 5-5:
TRANSPORTATION COST ESTIMATES FOR ANALYTICAL SCENARIOS
(Cents per Gallon of Gasohol at the Terminal)

Scenario 1 Scenario 2 Scenario 3 Scenario 4

Base Case (10 percent) 1.58 0.43 1.58 0.43
10 Percent Alternatives

A 1.58 0.43 1.90 0.43

B 1.85 0.19 1.85 0.30
5 Percent Alternatives

A 1.39 0.29 1.72 0.29

B 1.70 0.17 1.70 0.23

74


6) Transportation costs from the terminal to the service station served by
the terminal remain constant.

7) Gasohol is transported at the same rates as gasoline.
8) Pipelines do not transport gasohol.

As can be seen in the exhibits, several factors jointly determine the effect of
transportation costs on the delivered cost of gasohol at a distribution terminal. These
include transportation mode, shipment distance, volume of shipment, destination of
shipment, and point of blending. Implementation of special blending requirements for
gasoline blended with ethanol to contro] gasohol volatility can have a significant effect
on each of these factors and thus on the impact of transportation costs on the delivered
cost of gasohol. Of critical importance in terminal blending is whether the use of
special gasoline for blending will require the use of a more expensive transportation
mode to deliver the specially blended gasoline to the terminal blending point. If
specially blended gasoline shipments are not of sufficient size to meet the minimum
batch requirements of the mode currently used to move gasoline to the blending point,
the special gasoline will have to be delivered by a more expensive mode, and the cost of
delivering gasohol to the distribution terminal will rise. In this case, total transpor-
tation costs could be controlled only through consolidation of the market for special
blends in that area, resulting in the exit of firms from the gasohol distribution system.
If the gasoline transportation mode to the terminals blending gasohol remains the same,
however, transportation costs will not change, and consolidation will not be necessary.
Thus, where terminal blending continues under the proposed regulatory environment,
the major factor affecting transportation costs is whether the specially blended
gasoline will have to be transported by a more expensive mode than the standard
gasoline previously blended with ethanol to make gasohol.

The maximum increase in transportation costs due to terminal blending can be
estimated if it is assumed that:

e the existing ethanol and gasoline supply relationships continue to exist;

e all special gasoline is shipped to the terminal by truck; and

e the gasoline previously blended with ethanol at the terminal was shipped
by pipeline and barge in proportions equal to those shown in Exhibit 3-2

for 1984 (62 percent of ton-miles by pipeline, 38 percent by barge).
59


Year

1979
1980
1981
1982
1983
1984

EXHIBIT 2-2:
DOMESTIC CAPACITY AND OPERATING RATES

(million gallons/year)

Capacity Operating Rate
55 45.5%
100 50.0%
260 26.9%
425 40.0%
550 70.0%
625 67.2%

pomestie production domestic capacity x 100.

Sources:

1979-1983 statistics from E.E, Ecklund, "Status and Directions
of the Use of Aleohols and Other Oxygenated Hydrocarbons in
North America," VI International Symposium on Alechol Fuels

Technology, May 1984. [964 statistics from Office of Alcohol

‘uels, U.S. Department of Energy, Sixth Annual Report on the

Use of Alcohol in Fuels, April 1985, p. 1.


2.5 CURRENT ISSUES

The regulatory environment and economic situation of the domestic fuel ethanol
industry are in a state of constant change. Current issues which will affect the
long-term growth and stability of the fuel ethanol industry include: the EPA mandated
phasedown of lead in gasoline; a Clean Air Act waiver approval by the EPA for a
DuPont gasoline blend containing methanol, cosolvent higher alcohol, and a DuPont
proprietary corrosion inhibitor; a number of proposed legislative changes to tax
incentives and import regulations for fuel ethanol; and ongoing research in alcohol fuels
technology.

Lead Phasedown

On March 7, 1985, the EPA announced a final ruling on its proposed regulation regarding
gasoline lead phasedown. A limit of 0.1 grams of lead per leaded gallon of gasoline was
imposed, effective January 1, 1986, with an interim standard of 0.5 grams per leaded
gallon, effective July 1, 1985.) The intent of this regulation was to reduce the health
Tisks of airborne lead and to reduce the use of leaded gasoline in unleaded
gasoline vehicles, which can poison the catalytic converter and significantly increase
exhaust emissions.

The phasedown of lead in gasoline could have a major impact on the fuel ethanol
market. While some major refiners may find it economically and/or logistically
attractive to make the capital investment needed to enhance octane ratings by
increasing reformer severity, others, especially small refiners, may turn to an alterna-
tive octane boosting additive such as ethanol.” Ethanol availability and price, as well as
possible regulatory factors, will influence what part ethanol will have in filling the
increased demand for nonleaded octane enhancers.°

The DuPont Waiver

On January 14, 1985, the EPA conditionally granted DuPont a waiver of the Clean Air
Act for a gasoline blend containing methanol, cosolvent aleohol, and a DuPont
Proprietary corrosion inhibitor, DGOI-100. The waiver request, as submitted, called for
a maximum of 5 volume percent methanol and a minimum of 2.5 volume

1Volume 50, FR 9386 (March 7, 1985)
ztntormation Resources, Inc., Aleohol Outlook, March 1985, pp. 2, 17.

35
‘Under EPA's Lead Phase-Down Will Ethanol Blends Save the Independent," Lundberg
Letter, November 9, 1984, pp. 1-6. ,
30


EXHIBIT 5-1:
SCENARIO 1

Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles

Base Case:

Alternative A:

Alternative B:

Terminal Blending of 10 Percent Ethanol with Standard Gasoline

Ethanol Blend Demand = 50,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Pipeline

Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates

Transportation Costs:
Gasoline: 1.2¢ per gallon; $22,680 for 45,000 barrels
Ethanol: 5.025¢ per gallon; $10,553 for 5,000 barrels
Total: $33,233 for 50,000 barrels
Average: 1.58¢ per gallon

Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 100,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Pipeline

Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates

Transportation Costs:
Gasoline: 1.2¢ per gallon; $47,880 for 95,000 barrels
Ethanol: 5.025¢ per gallon; $10,553 for 5,000 barrels
Total: $58,433 for 100,000 barrels
Average: 1.39¢ per gallon

Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case because the
Proportion of gasoline in the blend increases,
and gasoline costs less to deliver than ethanol.
No change in modes.

Refinery Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 100,000 barrels per month

Transportation of Gasohol from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Refinery by Barge

Transportation Costs:
Gasohol: 1.55¢ per gallon; $65,100 for 100,000 barrels
Ethanol: 3.0¢ per gallon; $6,300 for 5,000 barrels
Total: $71,400 for 100,000 barrels
Average: 1.70¢ per gallon

Comment: Transportation cost per gallon of gasohol in-
creases in comparison to the base case (and
Alternatives A and B) because the gasohol is
shipped by 4 more expensive mode, barge, than
the standard gasoline previously blended at the
terminal (pipeline). The increase is greater
than the cost savings in ethano] transpor-
tation, which were achieved by consolidating

of shipments and shifting to a less expensive
mode.

66


EXHIBIT 5-3:
SCENARIO 3

Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles

Base Case:

Alternative A:

Terminal Blending of 10 Percent Ethanol with Standard Gasoline

Ethanol Blend Demand = 20,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Pipeline

Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates

Transportation Costs:
Gasoline: 1.2¢ per gallon; $9,072 for 18,000 barrels
Ethanol: 5.025¢ per gallon; $4,221 for 2,000 barrels
Total: $13,293 for 20,000 barrels
Average: 1.58¢ per gallon

Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 40,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates

Transportation Costs:
Gasoline: 1.55¢ per gallon; $24,738 for 38,000 barrels
Ethanol; 5.025¢ per gallon; $4,221 for 2,000 barrels
Total: $28,959 for 40,000 barrels
Average: 1.72¢ per gallon

Comment: Transportation cost per gallon of gasohol in-
creases in comparison to the base case be~
cause the specially blended gasoline must be
shipped by a more expensive mode than the
standard gasoline, offsetting any transpor-
tation cost reductions related to the decreased
proportion of ethanol in the blend.

68


Alternative B:

EXHIBIT 5-3: (Continued)

SCENARIO 3

Refinery Blending of 5 Percent Ethanol with Specially Blended

Gasoline

Ethanol Blend Demand = 40,000 barrels per month
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by Barge

Transportation Costs:

Gasohol:
Ethanol:
Total:
Average:

Comment:

1.55¢ per gallon; $26,040 for 40,000 barrels
3.0¢ per gallon; $2,520 for 2,000 barrels
$28,560 for 40,000 barrels

1.70¢ per gallon

Transportation cost per gallon of gasohol in-
creases in comparison to the base case be-
cause the gasohol is shipped by a more expen-
sive mode, barge, than the standard gasoline
previously blended at the terminal (pipeline).
Increase here is greater than cost savings in
ethanol transportation, where consolidation of
shipments permits use of less expensive mode.
These cost savings, however, are sufficient to
reduce transportation cost per gallon below
those for Alternative A, where consolidation
of ethanol shipments does not occur.

69


13

EXHIBIT 2-12:
ETHANOL AND GASOLINE PRICES, 1975-1985

(dollars per gallon)

Ace te et oan res “gan pag Heme a op
Yew, Denatured, 200 Proof _Net of Federal Tax Exemption Leaded Unleaded Leaded Unleaded Average
1975 1.100 1.100 0.567 — 0.609 — —_—
1976 1.250 1.250 9.590 0.614 0.636 —_ —
1977 1.250 1.250 0.622 0.656 0.674 _ _—
iste 1.220 1.220 0.626 0.670 9.694 —_ 0.652
1978 1.365 0.965 0.887 0.903 0.922 —_ 0.882
1980 1.730 1.330 1.191 1.245, 1.281 _ 1.221
1981 1.940 1.540 AML 1.378 1.439 1.470 1.383
1982 Lars L315 Lzze 296 Lair 1.261 Las
1993 1.815 1.315, 1.157 1241 1.372 1.383 1.225
19% 1.815, 1.318 4429 LUD _ 1.366 1.AS8
rsest 1.635 1.035 Lang 1.208 — 1.340 Lise

Tevrrent prices.

Sources: Ethanol prices from “Current Prices of Chemicals and Related Materials," Chemical Ma fer, midyear issues and Alcohol Week, June 24, 1985, p. 13.
Gasoline prices from Energy information Administration, U.S. Department. thi eview, various issues.


APPENDIX A:

DETAILS OF STATE ALCOHOL BLENDING TAX INCENTIVES

79


CHAPTER 2:
INDUSTRY PROFILE

Ethanol, also known as grain alcohol, has been produced through a fermentation process
for thousands of years for use as a beverage. Since the development of the internal
combustion engine, ethanol has also competed with gasoline as a potential motor fuel.
This section profiles the supply, demand, pricing, and other characteristics of ethanol
used as a fuel.

2.1 SUPPLY

Fuel ethanol in the United States is supplied primarily through domestic production (77
percent in 1984), but increasingly through imports (23 percent), which have grown
steadily since they first became a factor in the U.S. supply in 1981. The ethanol may be
produced either synthetically from petroleum-derived naphtha or ethylene, or through
fermentation. Current tax incentives for the production and use of fuel ethanol, which
require that the ethanol be produced from renewable resources, favor the fermentation
process. Therefore, synthetically produced ethanol is limited to uses as a solvent or a
chemical feedstock by economic constraints. It is production through fermentation that
is the focus of the discussion of domestic supply in this chapter.

Exhibit 2-1 details the volumes of fuel ethanol supplied by fermentation and imports
since 1979. Detailed discussions of supply — including production processes, capacity,
imports, and factors influencing supply — are provided in the following sections.

Domestic Production

Fermentation technology is the primary means of producing fuel ethanol in the United
States today. Two fermentation processes are used -- wet milling (70-80 percent) and
dry milling (20-30 pereent).! Both fuel-grade ethanol and beverage-grade ethanol may
be produced by fermentation, but the processing requirements are sufficiently different
to prevent inexpensive conversion of beverage ethanol capacity to fuel ethanol
eapacity. Stable beverage ethanol demand at 80-90 million gallons per year also works
to prevent conversion of production facilities,”

leg Ecklund, "Status and Directions of the Use of Alcohols and Other Oxygenated
Hydrocarbons in North America," VI_International Symposium on Alcohol Fuels

Technology, May 1984,

2thomas F. Killilea, Stanford Research Institute "Marketing Research Report: Ethyl
Aleohol," Chemical Economics Handbook, p. 644.5022P.

4



maximum cost increase is estimated to be 0.87 cents per gallon of gasohol for every 100
miles that the special gasoline is shipped to the terminal, less the estimated minimum
transportation cost savings associated with reducing the ethanol content of the blend to
5 percent (0.075 cents per gallon of gasohol). Similarly, refinery blending of 5 percent
blends could result in transportation cost savings if the gasohol is transported to the
terminal by the same mode as the standard gasoline and if the ethanol producer can
realize sufficient transportation cost scale economies by consolidating shipments. If,
however, the gasohol is transported by a different mode, transportation costs could
increase.

Finally, anelysis of the results of the 10 percent and 5 percent scenarios indicates that
special blending requirements to control gasohol volatility will probably have a smaller
impact on transportation costs if 5 percent blends are required. This is because
reducing the ethanol content of blends replaces relatively expensive to transport
ethanol with gasoline; and because larger quantities of specially blended gasoline and
gasohol will generally move through the distribution system for 5 percent blends than
for 10 percent blends, reducing the likelihood of modal changes.


oT

EXHIBIT 2-5: (Continued)
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE
JANUARY 1984

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The production of fuel ethanol by fermentation requires four steps. First, starch or
sugar feed is treated to yield a sugar solution. Second, the solution is fermented to
produce ethanol and carbon dioxide using bacteria or yeast. Third, the fermentation
product is concentrated inte 190-proof ethanol by distillation. Finally, the remaining
water is removed through a process called azeotropic distillation which involves
distillation with a solvent added and recovery of the solvent. Water must be reduced
below 0.3 percent of volume to prevent phase separation, which causes engine damage
and poor performance. If a grain feedstock is used, the remaining material, after the
ethanol has been removed, is a valuable by-product called distillers' grain, which is a
high protein animal feed.! Beverage ethanol production does not require the azeotropic
distillation step, but does require additional separation to remove toxie higher alcohols
present as impurities in the distilled ethanol. Fuel ethanol is typically denatured by
adding 2 percent gasoline, as required by law to discourage beverage use.?

Current fuel ethanol production capacity at all fermentation ethanol production
facilities is approximately 625 million gallons per year.? Actual production levels (67
percent of eapacity)* are considerably below capacity due to the downward pressure on
demand caused by 1) the availability of low-priced imported fuel ethanol; 2) the
declining price of gasoline relative to ethanol; and 3) generally soft demand for motor
fuel (Exhibit 2-2). Capacity growth, which averaged 69 percent per year between 1979
and 1984, has slowed in recent years, to 29 percent in 1982-1983 and 13 percent in

1983-1984, At this time there are 53 major commercial facilities producing fuel-grade
ethanol via fermentation in the United States.°

Factors affecting the availability of domestic fuel ethanol include the delivered price
and availability of feedstocks, and the price and marketability of byproducts.
Feedstocks, which account for as much as 80 percent of the price of fuel ethanol,

lottice of Technology Assessment, Gasohol: A Technical Memorandum, 1979, pp. 3-4,
10.

Mueller Associates, Inc., Gasoline Octane Enhancement: Technology, Economics, and
Environmental, Health and Safety Considerations, 1985, p. VI-10.

Softice of Alcohol Fuels, Sixth Annual Report on the Use of Alcohol in Fuels, April 1985,
p. 1.

‘Peter Busowski, Editor, Alcohol Week, personal communication, August 5, 1985.
5 Herman and Associates, July 1985.

2



88

Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS

(1984)
QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE (type and amount) CREDIT QUALIFICATIONS STATUS
Kentucky 10% ethanol or 35¢ credit per | produced from U.S. coal or Current law (7/1/82)
methanol (“fuel gallon “fuel renewable resources at plants { Expires: 6/30/86
grade alcohol” - grade alcohol” | powered primarily by U.S.
198 proof ) coal or renewable resources
reciprocity for similar
“fuel grade alcohol” if
Kentucky product similarily
exempted
Louisiana 10% ethanol 8¢ gallon fuel must be produced in Current law (7/1/79)
(full exemption)] Louisiana Expires: 7/1/89
Maine 10% ethanol 4¢ gallon reciprocity if other states Proposed law
(1/1/86) provide similar exemptions L.B. #418 (effective
34 (1/1/87) to ethanol produced in Maine 1/1/86) would expire
2¢ (1/1/88) : 2/31/89
Wd (1/1/89)
Maryland 10% ethanol or 3¢ gallon will not expire as long as Current law (7/1/83)
methanol Dept. of Transportation No expiration date
“sinking fund” is maintained
Michigan 102 ethanol 4é gallon reciprocity with states having} Current law(12/21/80)|
2¢ (1/1/85) equal exemptions entitles Expires: 12/31/86
1d (1/1/85) product to full exemption; (H.B. 5339 pending
otherwise, only 2¢ per gallon {| would revoke exemp-
allowed now, or half of full tion)
exemption
Minnesota 10% ethanol 2¢ gallon None Current law (7/1/83)
4¢ (1985) Expires: 199)

Herman & Associates



18

SUMMARY OF STATE, TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FURLS (Cont'd)

QUALIFYING ALCOHOL EXEMPTION onl RESTRICTIONS AND
STATE (type_and amount) CREDIT QUALIFICATIONS STATUS
Tlitnots At Least 10% alcohol] 4% gallon Made from “agricultural products or by- | In Effect
(xasohol) (salen tax) | productr.” Expires: 12/31/92
Indiana At least 10% ethanol| 1% gallon “agricultural ly-derived ethyl alcohol” In Effect
(gasohol) (sales tax) Expiren: 7/1/86
15¢ gallon “Agticultural ethanol produced in the In Fffect
production U.S. only” Pxptren: 7/1/92
grant (on
alcohol)
Towa At least 10% alcohol]! I¢ gallon “Diatilled from cereal graina...grow inj In Effect
(ganohol ) the U.S.” Expiren: 6/30/92
Kansan At least 10% ethanol! 4¢ galion “Agricultural ethyl alcohol...distilled | In Effect
3¢ (7/1/86) | in U.S. from U.S. produced gratin” No expiration date
2¢ (7/1/87)
Kentucky “fuel-grade alcohol”| 35¢ gallon Derived from U.S. coal or U.S. renewable| In Fffect
(10% or Lema ethanol | credit rerources and "produced in a plant or Exptrea: 6/30/86
or methanol) (on alcohol)| facttity powered primarily by U.S. pro-
duced coal or U.S. renewable resources.”
Reciprocity not to exceed valve of
credit for Kentucky-diatilled alcohol.
Louisiana At least 10% alcohol| i6¢ gallon “Distilled in Lou{siana from egricultur-| In Effect
(ganohol ) al commodities”, at least 10% of which Exptren: 1/1/92
must he grow in Loutstana (by monetary
value)

Herman & Asnociaten



rs

SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS (Cont'd)

Merman & Asanctaten

QUALIFYING ALCOHNI, EXEMPTION OR RESTRICTIONS AND
STATE (type and amount) CREDIT QUALIFICATIONS STATUS
South Dakota A minfmum of 10% Y prllon “Derived from cereal grain” In Effect
ethanol Expirea: 6/30/92
Tennesnee A minimum of 10% &f gallon “Derived from agricultural or forest In Effect
ethanol (paschol) products or other renewable resourcerTM Explres: 12/31/88
and manufactured in Tennessee. Recipro-
city for states reducing or exempting
Tennessee ethanol from ita motor Fuel
tax not to exceed value of Tetnesaee
exemption or reductlon.

Texan At least: 10% ethanot| 5é¢ gallon “Produced ot diatilled from a renewable In fffect
4é (1/1/87) source.” Applies first to ethanol Expires: 1/1/91
3¢ (1/1/88) | produced in-etate, and then td ethanol
2¢ (1/1/89) from states with reciprocal etempttons,

id (1/1/90) | not to exceed a maximum annual limit of
$10.85 million.

Utah Ethanol 40¢ pallon “Produced from organic material” at a Ta Fefect
production Utah plant with name-plate capacity of Expirea: 7/1/90
credit 1 militon gallons per year, Muat be
(on alcohol)| decreased by 10 for every if increase

in Federal exemption.
Virginia At least 19% ethanol] BA gallon Ethanol muat be “diatilled tr virginta In Effect
or “synthetic motor | 6¢ (7/1/86) | from agricultural, forestry, or waste Expires: 7/1/92
fuel” 4¢ (7/1/88) | products” in a plant not usirg natural
2¢ (7/1/90) | gan or petroleum an a primary fuel.
Synthetic motor fuel must be “produced
in Virginta From coal.”
Washington At least 9.5% 2.94 gallon | Mist be “produced from renewnble re~ In Fffect
alcohol (gasohol) blend nourcen in-state”. Reciprocity for Expires: 12/31/92
(blender tax| states providing at Learnt equal tax
ee credit) exemption or credit.



blenders. The federal tax exemptions for alcohol blends since 1978 are detailed in
Exhibit 2-9, and the current state tax exemptions are detailed in Exhibit 2-10 and
Appendix A.

The tax subsidies for aleohol blends have dictated a fuel ethanol market where fuel
ethanol is blended with gasoline in a 1:9 ratio. The resultant 10 percent ethanol blend,
commonly known as gasohol, is eligible for the highest subsidy through tax exemptions.
Gasohol has the lowest concentration of aleoholin gasoline which is still eligible for the
excise tax exemption. Gasohol has the highest concentration of fuel ethanol in
gasoline which is allowed by a waiver. Fuel ethanol that is blended in lower
concentrations or that is not sold through retail outlets is qualified for an income tax
credit designed to encourage fuel ethanol use where the excise tax exemption is not
applicable.” The income tax credit is not as advantageous to the blender as the excise
tax exemption, since use of the tax credit requires profitability. Consequently, no
company has claimed the blender income tax credit.

The impact of state tax incentives on gasohol sales may be seen by comparing the tax
incentives shown in Exhibit 2-10 and Appendix A to state sales and market share
statistics in Exhibits 2-5 and 2-6. The statistics suggest that the federal tax incentives
alone are not sufficient to bring the price of ethanol down to the level where gasohol is
competitive with gasoline. Of states with no tax incentive for the use of fuel ethanol,
only Arkansas, California and North Carolina have gasohol market shares in excess of 2
percent. In each of these states tax incentives for fuel ethanol have been discontinued
within the past two years and the gasoho! market share may be expected to dectine.Y®

The effects of state tax subsidies may be further analyzed by examining the demand
impacts of changes in state tax subsidies, as illustrated in Exhibit 2-11. The doubling of
the tax incentive in Louisiana in July 1984 led to an increase in gasohol sales of 24.4
million gallons in six months (an increase from virtually nonexistent gasohol sales to a
2.3 percent market share). However, as the statistics for Wyoming show, there may be
very little change in consumption in a state where limited feedstock availability
restricts ethanol production. In the case of California the impact on demand was also

Isaivatore Lazzari, op. cit., p.3.
2tbid, pp. 7-8.
Serie Vaughn, President, Renewable Fuels Association, August 19, 1985.

{Herman and Associates, Survey of Federal and State Alcohol Fuel Regulations, July
1985,

Sottice of Alcohol Fuels, Fourth Annual Report, op. cit., pp. 9-10.

22


JACKFAU-85-322-6

THE EFFECT OF GASOLINE VOLATILITY CONTROL
ON SELECTED ASPECTS OF ETHANOL BLENDING

Final Report
Work Assignment 6-1
Contract No. 68-03-3244

Submitted to:

U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Mobile Sources
Ann Arbor, Michigan, 48105

November 4, 1985

JACK FAUCETT ASSOCIATES

5454 WISCONSIN AVENUE « SUITE 1155
CHEVY CHASE, MARYLAND 20815

(301 657-8223


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1984 STATE TAX INCENTIVES

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4% 3% vw -3¢ ©
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9.5¢
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for Alcohol “NY
Blended Fuels

Herman & Associates

* Legislation Pending to Establish Exemption



e A 60,000,000 gallon per year plant would typically ship ethanol to 30 to 50
terminals.

Shipments of gasohol from the terminal to the reseller are typically made by tank
truck, though they may be by another mode. The distance from the terminal to the
retailer is generally within a radius of 150 miles.

There are no pipeline shipments of ethanol or gasohol because of the special handling
required in their transport. Because multi-product pipelines are not dehydrated, water
can collect in them and cause phase separation in gasohols. Though multi-product
pipelines can handle alcohol blends satisfactorily if separate facilities are dedicated to
this service, the capital investment required to provide the separate line segments,
tankage, and loading facilities is substantial.” The investment cannot be justified based
on current pipeline and refiner expectations for long-term demand that depends on the
continuation of state tax incentives.

3.3 TRANSPORTATION COSTS

Until recently, the tariff rates for movement of non-beverage alcohol were primarily
based on shipments of chemical grade ethanol for industrial use which requires special
handling. After manufacturers succeeded in negotiating improved rates for fuel ethanol
in the early 1980's, transportation costs dropped by almost halt. Estimates of current
rates for fue] ethanol are provided in the following table:

1985 Tariff Rates for Fuel Ethanol!

Mode Rate/Gallon Typical Shipment Size (Gallons)
Truck 2.94¢/100 miles® 7,800 gallons
Rail 3.76¢/100 miles 29,000 gallons

5¢/200 miles
6.5¢/300 miles

Barge 0.75¢/100 miles 420,000 gallons
Lindustry information obtained through interviews of ethanol producers, oil refiners,
pipeline companies, industry association, and other industry analysts.
Teel, op. cit.
3 Harold, op. cit., p. 769.

‘Rstimates based on interviews of ethanol producers, industry analysts, and railroad
marketing personnel.

Struck rates are often quoted in “running miles," i.e., the miles needed for a round trip.
The rate in running miles is 1.47¢ per 100 running miles. Truck rates are presented here
in destination miles for purposes of comparison with other rates.

45


became saturated, then the price of fuel ethanol would no longer be competitive with
other octane-boosting components of gasoline, even with the federal and state
subsidies. It is estimated that the fuel ethanol industry would have to reach a
production level of 2 billion gallons per year to saturate the market for byproducts;
consequently, it is likely that the growth of the industry would be constrained by rising
feedstock costs before the byproduct credit would be reduced.

Ethanol Imports

Ethanol imports account for a substantial fraction of the fuel ethanol supply in the
United States, 23 percent in 1984 (Exhibit 2-1). Brazil, which was the source of 80.3
percent of the ethanol imported into the United States in 1984” has lower labor costs
and lower feedstock costs for ethanol production than the United States. Imports by
country of origin are listed in Exhibit 2-3.

Ethanol imported for fuel use has increased from virtually nothing in 1980 to
approximately 123 million gallons in 1984. In the past, imports have been encouraged
by both federal and state tax subsidies: federal excise tax exemptions are available for
both domestic and imported ethanol, as are some state exemptions. However, when
imports were identified as a threat to the domestic industry, a customs duty was
imposed on ethanol imported for fuel use (in addition to the 3 percent ad-valorem duty
on ethanol imported for non-beverage purposes), The amount of this duty was 10 cents
per gallon in 1981, 20 cents per gallon in 1982, 40 cents per gallon in 1983, 50 cents per
gallon in 1984 and 60 cents per gallon in 1985, where it is to remain through 1992 when
the federal excise tax exemptions will expire.? Since 1984, the customs duty on
imported fuel ethanol has been high enough to offset the subsidization of imported
ethanol by the federal excise tax exemption for gasohol.

Nevertheless, domestic consumption of imported fuel ethanol continues to grow. This
may be because some foreign-produced ethanol remains exempt from the import duty
on fuel ethanol. Of the 123 million gallons of ethanol imported into the United States
in 1984, 83 million gallons entered paying the tariff on fuel ethanol while an estimated

loftice of Technology Assessment, op. cit., p. 20.
2mnternational Alcohol Outlook," Aleohol Outlook, March 1985, p. 14.

3saivatore Lazzari, Congressional Research Service, Federal Tax Provisions Relating to
Alcohol Fuels Including Recent Changes Under the Tax Reform Act of 1984, November 6,
1984, pp. 15-16.

9


inelude corn (92 percent of operating capacity in commercial facilities), ! wood,
sorghum, molasses, other grains, and various food processing wastes.2 Variable grain
prices due to seasonal effects such as weather and crop yields may result in large
variability in the price at which fuel ethanol may profitably be sold. This increases the
risk to investors and discourages future investment in fuel alcohol distilleries. Further-
more, aside from these yearly fluctuations, there may be a long run ceiling on the
amount of feedstock available to the fuel ethanol industry. An estimated 1 to 2 billion
gallons of ethanol per year may be produced in the United States before competition
between food demand for grain and fuel demand for grain will significantly increase
grain prices.?

A second factor which determines whether fuel ethanol can be produced competitively
is the marketability and value of byproducts from the fermentation process. The two
distinet fuel ethanol fermentation processes, wet milling and dry milling, yield different
byproducts. In wet milling facilities, the byproducts contain most of the non-starch
material in a grain feedstock and are recovered prior to the fermentation process, The
byproducts are corn oil, corn gluten meal and corn gluten feed which are sold as food
and high-protein animal feed. In dry milling facilities the byproducts are recovered
from the material remaining after fermentation has consumed most of the starches and
sugars in the feedstock. These byproducts, called distillers dried grains and solubles,
are also a high protein animal feed. Furthermore, either fermentation process yields

high quality carbon dioxide which may be recovered and sold for bottling, packing or
tertiary oil recovery.4

The value of recoverable byproducts from feed ethanol produced from corn at a price of
$2.80 per bushel would be 43 cents per gallon of ethanol produced by dry milling,® and
66 cents per gallon of ethanol produced by wet milling. If the fuel ethanol industry
were to expand to such an extent that the market for the animal feed byproducts

loftice of Alcohol Fuels, U.S. Department of Energy, Fourth Annual Report on the Use
of Alcohol in Fuels, March 1983, pp. 6-7.

2n Aleohol Week Price Watch: Key Fuel Grain and Byproducts Prices," Alcohol Week,
May 20, 1985, p.11. _—_

softice of Technology Assessment, op. cit., p. 31.

4David E. Hallberg, "Testimony before the Subcommittee on Energy Conservation and
Power of the Committee on Energy and Commerce, U.S. House of Representatives,"
June 28, 1983.

softice of Technology Assessment, op., cit., p. 20.



EXHIBIT 4-4:
SCENARIO 4

Distance from Refinery to Terminal = 50 miles

Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles
Terminal Demand for Gasohol = 20,000 barrels per month

Base Case:

Alternative A:

Alternative B:

Terminal Blending of Gasohol with Standard Gasolines
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck

Transportation Cost:
Gasoline: 0.155¢ per gallon; $1,172 for 18,000 barrels
Ethanol: 2.94¢ per gallon; $2,470 for 2,000 barrels
Total: $3,642

Terminal Blending of Gasohol with Specially Blended Gasoline

Transportation of Gasoline from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Terminal by
Truck

Transportation Cost:
Gasoline: 0.155¢ per gallon; $1,172 for 18,000 barrels
Ethanol: 2.94¢ per gallon; $2,470 for 2,000 barrels
Total: $3,642

Impact: None

Comment: No transportation cost impact since no change
in modes, volumes, or distances.

Refinery Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by

Truck

Transportation Costs:
Ethanol: 1.47¢ per gallon; $1,235 for 2,000 barrels
Gasohol: 0.155¢ per gallon; $1,302 for 20,000 barrels
Total: $2,537
Impact: Cost Saving of $1,105 Over Base Case and

Alternative A.

Comment: Transportation costs fall in comparison to the
Base Case and Alternative A because the
ethanol is shipped a shorter distance to the
refinery than to the terminal via the same
mode, truck.

58


Intense competition from other modes and the limited ability of rail carriers to supply
and move product to diverse locations quickly are cited as the primary causes of the

decline.!

3.2 ETHANOL AND GASOHOL DISTRIBUTION

The institutional and physical distribution systems for fuel ethanol are closely related
to those for gasoline and other petroleum products. Like petroleum products, the
institutional structure is currently comprised of many companies carrying out both
sequential and parallel operations, including producers, resellers, and retailers. It
involves transportation by a variety of modes, with each shipment planned to minimize
the cost of movement. The institutional and physical aspects of ethanol distribution are
discussed in the following sections.

Institutional Structure

Like the system for petroleum products, the institutional structure of the ethanol
marketing system is composed of producers, name brand and independent jobbers and
wholesalers, and name brand and private brand retailers. The elements of the
marketing chain are discussed further in the following paragraphs.

As discussed in Chapter 2, there are presently 53 major commercial facilities producing
fuel ethanol in the United States.” Most are located in the Midwest and corn-producing
regions. To date, ell of the ethanol plants are owned by companies other than oil
refining companies. However, this may change if moves continue by major oil
companies to acquire shares in ethanol companies, such as the partial ownership of
South Point Ethanol by Ashland Oil Company.

From the producer, ethanol is typically moved to a bulk terminal near the market, the
blending point for about 90 percent of ethanol blends. (With the exception of small
amounts blended at refineries, the remainder is blended at the retail outlet), In some
eases, the producer rents space from a terminal operator who also offers gasoline to

lujarold, op. eit., p. 769.
2Herman and Associates, op. cit.

41


28

SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHO!, BLENDED MOTOR FUELS (Cont'd)

Nerman & Aanoctates

QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE (type and amount) CREDIT QUALIFICATIONS STATUS
Maine At tenant 19% ethanol | 4é galton “Diatitled tn the State". Reduced hy To Re Fffective:
(1/1/86) Incrense tn Pederal exemptlon prior to V/1/A6
34 (1/1/87) | Jan. 1990. Reciprocity for states pro- | Explrem: 12/31/89
2¢ (1/1/8R) | viding at least equal exempticn. Annual
1é (1/t/89) | cap of $1.25 million, total crp of $5
million.
Maryland 10% or more ethanol | 3¢ gallon None In Effect
Expires: 6/30/86

Michigan 10% ethenol 1¢ gallon Produced in Michigan from other than In Fffect
petroleum or natural gas. Reduced by Expires: 12/31/95
increane {n Federal exemption. Recfpro—
city for states providing equal or
greater tax exemption, credit or reduc-
tion.

Minnesota At leant 10% ethanol} 44 gallon “Derived from agricultural or forest In Effect
products ot other renewable resourcen Expires: 6/30/92
dintilled in the U.S. and derived from
epricultural products produced in the
U.S."

Mississippi At least 10% ethanol | 6% gallon “Distilled in Miasieaippi”, acd “pro- In Effect

(maler tax) | duced from renewable resources Expiren: 12/31/92

Montana Not lean than 10% 504 gallon “Dintilled {n Montana from Moitana agri-| In Effect

ethanol 30¢ (4/1/87)| cultural products including Montana wood| Expires: 4/1/89
production or wood products”. Cap of $2.5 million
credlt (on per year.
alcohol)

Nebraska At leant 19% ethanol! 34 pallon “Produced from cereal grainn dr domeatic| In effect
agricultural commodition” Fxptren: 12/31/92



EXHIBIT 2-13:

DETERMINATION OF GASOHOL PRICING BY BLENDER'S PROFIT MARGIN

Federal tax credit (¢/gal.)
State tax credit (¢/gal.)

REVENUES
Total Sales Revenue (100,000 gal.)

EXPENSES 1
Gasoline Cost ($0.829/ga})
Ethanol Cost ($1.56/gal.)
Total Fuel Cost (100,000 gal.)
State Tax ($0.15/gal.)
Federal Tax ($0.09/gal.)
Total Expenses

Operation Income
Tax Liability (45%)
Net Profit After Tax
Gross Margin ($/gal.)
Net Profit ($/gal.)

Retail Sales Price

Gasoline Gasoho) (10% Ethanol)

Base Case Case 1 Case 2
6 6 6
0 0 5
115,900 117,210 112,210
82,900 74,610 74,610
0 15,600 15,600
82,900 90,210 90,210
15,000 15,000 10,000
9,000 3,000 3,000

aegis

106,900 108,210 103,210
9,000 9,000 9,000
4,140 4,140 4,140
4,860 4,860 4,860
0.090 0.090 0.090
0.0486 0.0486 0.0486
1.1597 1.1721 3.1221

ivarch 1985 wholesale price for regular unleaded gasoline.
2uareh 1985 wholesale price for fermented, 200 proof fuel alcohol.
3mareh 1985 retail price for regular unleaded gasoline.

Sources: Ethanol wholesale price from

Alcohol Outlook, May 1985, p. 3. Gasoline wholesale

price from Energy Information Administration, Petroleum Marketing Monthly, March
1985, p. 45. Gasoline retail price from Energy Information Administration, Monthly
Energy Review, March 1985, p. 98.

28


Gasoline transportation costs, in contrast, are significantly less due to the availability
of low cost pipeline transportation, and correspondingly smaller reliance on expensive
truck and rail modes. Pipeline transportation costs 0.12¢ to 0.35¢ per gallon per 100
miles. Barge and truck rates for gasoline are somewhat lower than those for ethanol.
Barge movement of gasoline costs 0.15 to 0.47¢ per gallon per 100 miles. Tank truck
transportation costs for gasoline are 1.6¢ to 2.1¢ per gallon per 100 miles. Ethanol/
gasoline blends are transported at the same rate as gasoline on all modes except
pipelines, which are not available for gasohol movements.-

3.4 STATE TAX INCENTIVES AND EXCHANGE AGREEMENTS

The distribution of ethanol and ethanol blends is dominated by a policy factor outside
the control of ethanol producers or other members of the distribution chain: state tax
incentives. State tax incentives determine whether ethanol blends can be sold at prices
competitive with gasoline in the state. Also, where state tax incentives require
production of ethanol from state-produced resources, they determine whether a given
producer can distribute products for sale in that state.

The impacts are substantial. Exchange agreements, a distribution and marketing device
used heavily by the oilindustry, have been relied upon to a significant extent by some
ethanol producers. In an exchange agreement among oil companies, a company with
product in, for example, Texas, may arrange for an East Coast oil company to supply
product to a customer in New York. In exchange, the Texas refiner delivers product to
the East Coast refiner's customer in Texas or another location. The exchanges are
usually arranged as a means of reducing transportation costs. In the ethanol industry, in
contrast, they are frequently used as a means of supplying product to a buyer when the
Producer's product cannot qualify for the tax exemption in the buyer's state. Thus, an
ethanol producer in Nebraska, who has a customer in Minnesota, may arrange for a
producer in Minnesota (or elsewhere) whose product qualifies for the Minnesota tax
credit to deliver product to the customer. In exchange, the Nebraska producer will
provide product to an agreed upon customer for the other party to the exchange
agreement.

lyarold, Op. cit., p. 768. Costs of transportation for liquid petroleum fuels were updated
from 1981 to 1985 prices using the January 1981 and 1985 price indexes for rail
transportation (STCC 29) published by the Bureau of Labor Statistics.

46


or regular unleaded grade. It is most common at present for gasohol to be blended by
wholesalers using 87 octane regular unleaded gasoline from pipeline terminals and
ethanol from fuel ethanol manufacturers. In this case, the gasohol blend is a premium
unleaded fuel of $0 to 91 octane, comparable to nonalcohol unleaded premium gasoline
with an octane rating of 91. Currently, the retail price of premium unleaded gasoline is
8.7 cents higher than the retail price of regular unleaded gasoline, while the gasohol
blended in this manner commanded a price over regular of about 4 cents in 1984.”

Gasohol prices may be estimated from gasoline prices and ethanol prices if it is
assumed that the blender will price the gasohol in order to receive the same income and
net profit per volume of gasohol sold as per volume of gasoline sold. The methodology
for this calculation is shown in Exhibit 2-13, using current data for wholesale prices of
regular unleaded gasoline and gasohol and the retail price of regular unleaded gasoline.
The net profit per gallon of retail sales of 100,000 gallons of gasoline is determined
first as a base case. Case 1 is gasohol blended in a state where there is a 15 cent per
gallon state excise tax on gasoline and no state excise tax exemption for gasohol. Case
2 is gasohol blended in a state where there is a 15 cent per gallon state excise tax on
gasoline and a 5 cent per gallon state excise tax exemption for gasohol. The
calculations show that where there is no state tax exemption for gasohol, the gasohol
would be priced 1.3 cents per gallon higher than regular unleaded gasoline. Where there
is a state tax exemption of 5 cents per gallon for gasohol, the gasohol would be priced
3.5 cents per gallon lower than regular unleaded gasoline. However, since gasohol
blended from 87 octane regular unleaded gasoline would be a premium unleaded fuel of
90 to 91 octane, gasohol could sell at a much higher price in either case, a price closer
to the price of premium unleaded {in this example, $1.31 per gallon).? Thus, the blender
could improve his profits either by expanding his profit margin or by increasing sales at
the price of gasohol determined by a constant margin.

linergy Information Administration, Monthly Energy Review, op. cit., p. 98,

Zoftice of Alcohol Fuels, Sixth Annual Report, op. cit., p- 3.
SEnergy Information Administration, Monthly Energy Review, op. cit., p. 98.

28


Effects on Transportation Mode Assuming

Terminal Blending and Constant Ethanol Demand

If gasohol blending occurs at the terminal, the ethanol transportation mode will not
change because ethanol demand at a given terminal stays the same and the ethanol
producer continues to make the same number of shipments to the same destinations.
However, if the special blend volume is less than the minimum batch required for the
mode used to transport the standard gasoline previously blended with the ethanol, the
mode used to transport the specially blended gasoline will change to a more expensive
mode with smaller volume requirements. Because demand for gasohol is assumed to
double, this shift is less likely to occur than under a 10 percent terminal blending
seenario since over twice as much (2.11 times) specially blended gasoline will be

shipped.

Effects on Transportation Mode Assuming

Refinery Blending and Constant Ethanol Demand

If 5 percent gasohol blending occurs at refineries, an ethanol producer may be able to
combine numerous truck shipments to terminals into a single shipment to a refinery,
permitting use of a less expensive mode such as barge. As in the case of terminal
blending, however, there may be shifts in the modes used to transport product from the
refinery to the terminal if volumes are not large enough for use of the mode used for
standard gasolines. A change in transportation mode will also occur wherever the
standard gasoline previously blended with ethanol at the terminal was shipped by
pipeline, since pipelines will not be used for gasohol.

5.3 TRANSPORTATION COSTS

Any shift in transportation mode or destination for ethanol, gasoline, or gasohol would
have implications for the cost of delivering gasohol to the consumer. Four scenarios
are presented as a means of analyzing the potential transportation cost impacts of a
change from 10 percent to 5 percent ethanol content in gasohol (Exhibits 5-1 to 5-4).
The scenarios correspond to those presented in Chapter 4. Each contains a base case
and two alternatives, as follows:

e The base case is that developed for the corresponding scenario in Chapter
4, in which volatility controls do not exist.

65


EXHIBIT 2-1:
TOTAL FUEL ETHANOL SUPPLY

(million gallons)
Domestic
Production Imports
Percent Percent
of of

Year Volume Supply Volume Supply Total Supply
1979 25 100 0 0 25
1980 50 100 0 0 50
1981 70 64 40 36 110
1982 170 81 40 19 210
1983 385 87 60 13 445
1984 420 qT 123 23 $43
Sources: 1979-1983 statistics from E.E. Ecklund, "Status and Directions of the Use

of Alcohols and Other Oxygenated Hydrocarbons in North America," VI
International Symposium on Alcohol Fuels Technology, May 1984. 1984
Statistics from Niconal Outlook, March 1985.



as a “fuel extender," is by far the most common in today's fuel ethanol market.
However, there are signs that the second type of use may eventually dominate the
market. Many refiners are now offering sub-octane gasolines specifically produced for
blending with ethano] (Exhibit 2-7). This is part of a larger effort, among both small
and large refiners, to find an economical substitute for tetraethyl lead in the wake of
the EPA-mandated lead phasedown.

Demand for ethanol as an octane-enhancing additive to gasoline depends on tax
subsidies and the price and availability of other octane enhancers. Octane improvement
costs for increased refining severity and for several types of octane enhancing additives
are listed in Exhibit 2-8.) As can be seen in these statisties, without a tax subsidy,
ethanol is the most expensive means of octane enhancement. With a 5 cent per gallon
gasohol subsidy, ethanol] becomes competitive with tertiary butyl alcohol. With a 10
cent per gallon gasohol subsidy, ethanol becomes less expensive than any other means of
octane enhancement. It is important to note, however, that even if ethanol is favored
as an octane enhancer because of its attractive cost relative to alternatives, its supply
is unlikely to be great enough to satisfy all demand for octane. By 1990, total demand
for octane enhancement is expected to reach 7.4 billion octane number-barrels. (All
demand for octane enhancement in 1990 will be for unleaded gasoline. Estimated 1985
octane requirements, in comparison, are 4.1 billion octane-number barrels for leaded
gasoline and 5.4 billion octane number barrels for unleaded gasoline.)” If ethanol alone
were used to meet the demand, ethanol consumption would reach 20 billion gallons in
that year. This is at least ten times the projected capacity for fuel ethanol production
and also far exceeds the 1 to 2 billion gallon fuel ethanol demand level beyond which

fuel production would begin to compete with food uses for corn and other ethanol
feedstocks.?

Ethanol Demand and Tax Incentives

In 1978 there were no laws favoring the production or blending of alcohol fuels. and the
commercial production of fuel ethanol was virtually nonexistent. Rapid growth in fuel
ethanol production and consumption since 1978 has been encouraged by federal and
State legislation partially exempting ethanol blenders from federal and state excise
taxes on gasoline, and federal legislation granting federal income tax credits to ethanol

Isome small refiners do not have the capability to increase octane ratings of their
gasoline by increasing refining severity. These refiners have the choice of either selling
their product to a large refiner for further processing or blending their gasoline with an
octane~boosting agent to meet octane requirements.

2 Mueller Associates, Inc., op. cit., pp. 1-8, V-8.
Spavid E. Hallberg, op. cit. 18


SUMMARY OF STATE. TAX UNCENTIVES
FOR ALCOHOL, ALENDED MOTOR FURLS (Cont'd)

QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE {type and amount} CREDIT QUALIFICATIONS STATUS
Nevada At least 10% ethanol! If gallon “Derived from agricultual prodJucta” In Effect
No expiration date
New Jersey At leant 10% ethanol| Ad gallon “Grain derived” and "produced in the To Be Fffective:
(10/1/85) State from whole grain” 1o7 1785
6# (1/1/RR) Expiren: 1/1/92
4@ (1/1/90)
New Mexico At least 10% ethanol| 1I¢ gallon Until 7/1/87, “manufactured exclusively In Effect
BE (7/1/87)| in New Mexico.” After 7/1/87 also re- Expires: 7/1/91
5é (7/1/88)| quires at leant 50% of “agriciltural
34 (7/1/89)] feedstock by volume used in fermen-
o 2# (7/1/90)| tation” be produced tn New Mexico
ao
North Dakota At leaat 10% ethanol| Af gallon Methanol from coal or “agricultural pro-| In Pffect
or methanol 4¢ (7/1/87) | ducts produced entirely tn tha U.S.” Expires: 12/31/92
Reciprocity equal to what other atate
provider, but not to exceed X. Dakota
exemption.
Ohio Not more than !0% 254 gallon Wood or cereal grains in facilities of In Effect
ethanol credit (on leas than 2 million gallona per year, or| No expiration date
alcohol) produced from wood or cereal grains
through a “coal-fired procesr.” Reci-
procity for “aimtlar fuel” produced out—
of-state not to exceed Ohio's credit.
South Carolina! 10% ethanol 6¢ gallon Distilled in South Carolina facility To Be Effective:
with principal feedstock wooc, cereal 1/1/96
Brain, potatoes, sugar beets. or turnips! Explres: 6/30/92
(and by-products). Reciprocity for
states providing at least equal incen-
tive. Reduced by increane {ir Federal
dl { cemption prior to June 30, 5992,

Merman & Associates



EXHIBIT 4-2:
SCENARIO 2

Distance from Refinery to Terminal = 50 miles

Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles
Terminal Demend for Gasohol = 50,000 barrels per month

Base Case:

Alternative A:

Alternative B:

Terminal Blending of Gasohol with Standard Gasolines
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck

Transportation Costs:
Gasoline: 0.155¢ per gallon; $2,930 for 45,000 barrels
Ethanol: 2.94¢ per gallon; $6,174 for 5,000 barrels
Total: $9,104

Terminal Blending of Gasohol with Specially Blended Gasoline

Transportation of Gasoline from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Terminal by
Truck

Transportation Costs:
Gasoline: 0.155¢ per galion; $2,930 for 45,000 barrels
Ethanol: 2.94¢ per gallon; $6,174 for 5,000 barrels
Total: $9,104

Impact: None

Comment: No transportation cost change since no change
in modes, volumes, or distances.

Refinery Blending of Gasohol with Specially Blended Gasoline

Transportation of Gasohol from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Refinery by
Barge

Transportation Costs:
Ethanol: 0.375¢ per gallon; $788 for 5,000 barreis
Gasohol: 0,155¢ per gallon; $3,255 for 50,000 barrels
Total: $4,043

Impact: Costs Savings of $5,061 Over Base Case and
Alternative A.

Comment: Transportation cost savings occur because
consolidation of ethanol shipments permits use
of a less expensive mode, barge; and because
ethanol is shipped a shorter distance to the
refinery than to the terminal.

56


SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS

(July 1985)

QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE (type _and amount) CREDIT QUALIFICATIONS STATUS
Alabama At least 10% ethanol| 34 gallon Nerived from “agricultural forest pro- In Effect
(garohol) ducts or other renewable sourcen”. Reci-| No expiration date
proctty for atates reducing or exempt ing
Alabama-produced alcohal.
Alaska At least 10% alcohol| 8 gallon None In Effect
No expiration date
Colorado At least 10% alcohol| 5é gailon At leant 60% must be derived from “cer- | In Effect
eal grains, cereal grain by-priducta, Expires: 7/1/96
i potatoes or other tubers, sugar beeta,
| nugar heet by-products, or foraat pro-
ducta,” and limited to the first 2.5
million gallons per year from slanta
with a 5 million gallon per year or
tera capacity.”
Connect icut At least 10% ethanol| If gallon None In Effect
or methanol . No exptration date
Cranohol)
Florida At least 10% ethanol] 2é gallon None In Effect
(gasohol) Expires: 6/30/89
Hawali At leant 10% ethanol) 4% gallon “Biomana-derivedTM In Effect
(ganohol) {groan Explrea: 6/30/92
exctae tax)
Idaho At least 10% ethanol] 4¢ gallon “Manufactured” {n Idaho “from agricul~ In Fffect
(gasohol) tural or foreat producte growr” in Idaho! Expires: 4/30/16
“or wartes of thore products.”

Herman & Ananciaton:

Survey of Federal and State Aleahol Fuel Regulattonn



98

SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS

(1984)
QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND

STATE (type and amount) CREDIT QUALIFICATIONS STATUS

Alabama 10% ethanol 3¢ gallon produced from renewables Current law (8/1/80)
reciprocity for similar tax No expiration date
exemption

Alaska 10% ethanol 8¢ gallon None Current law (1/1/81)

No expiration date

Arkansas 10% ethanol 9.5¢ gallon full reciprocity to states Current law (7/1/81)

(anhydrous } (full exemption)| which exempt Arkansas ethanol | Expires: 7/1/91
from excise taxes effective
5/1/84.
California 10% ethanol or 3¢ gallon produced “from agricultural Current law (1/1/81)
methanol commodities, renewable Expires: 1/1/87
resources or coal.”

Colorado 10% ethanol 5d gallon applies only to first three Current law (1/1/82)
million gallons of ethanol Expires: 7/1/85
produced at plants under
17 million gallon capacity

Connecticut 10% ethanol 1¢ gallon None Current law (7/1/79)

No expiration date

Plorida 10% ethanol 4é gallon decreases to 2¢ per gallon Current law (7/1/80)
on 7/1/85. Proposal to extend| Expiration Date
full 4¢ per gallon exemption Current: 6/30/87
pending. Proposed: 6/30/92

Herman & Associates



CHAPTER 5

IMPACT OF REDUCING THE ETHANOL CONTENT OF GASOHOL TO 5 PERCENT

Ethanol is typically added to gasoline to produce a fuel that is 10 percent ethanol. One
means of reducing the mid-range volatility (e.g., percent evaporated at 160 degrees
Fahrenheit) of such ethanol/gasoline blends is to reduce the ethanol content of the fuel.
This chapter analyzes the effects on the logistics and costs of ethanol distribution and
blending practices of reducing the ethanol content of gasohol to five percent. The
analysis assumes that the gasoline mixed with the fuel must be specially blended for
mixing with ethanol, as discussed in Chapter 4. Total ethanol demand is assumed to be
the same as for 10 percent blending. Thus, gasohol sales are twice the level considered
in the 10 percent alternative, and demand for the specially blended gasoline is more
than twice its former level.

As in Chapter 4, the following issues are addressed:

° Where will the ethanol be blended into the gasoline?

° What transportation modes will be used for shipping the specially blended
gasoline, ethanol, and gasohol?

° What will be the effect on transportation costs of the change?

° What changes may be observed in market relationships and transaction
costs?
° What storage or equipment issues may arise as a result of the change in

blending requirements?

In the case of terminal blending, the analysis shows that the maximum transportation
cost increase per gallon of gasoholis 0.87 cents for every 100 miles the special gasoline
is shipped, less the estimated minimum transportation cost savings associated with
reducing the ethanol content of the blend to 5 percent (0.075 cents per gallon of
gasohol). The maximum net increase would occur if transportation of gasoline shifted
from pipeline (the least expensive mode) to truck (the most expensive). In the case of
refinery blending, transportation costs could increase a maximum of 0.91 cents per
Gallon of gasohol, again an increase that could be observed only if transportation from

63


9¢

EXHIBIT 3-2:

TRANSPORTATION OF PETROLEUM PRODUCTS
1972-1984

(billions of ton-miles)

Pipelines Water Carriers Motor Carriers Railroads

Year Total Tories “Ton-Miles % “Ton-Miles % ‘Ton-Miles =
1972 476.8 191.3 40.1 254.0 53.3 22.0 4.6 9.5 2.0
1973 480.4 205.0 42.7 238.0 49.5 23.7 4.9 13.7 2.9
1974 488.8 203.0 41.5 244.0 49.9 27.7 5.7 14.1 2.9
1975 515.2 219.0 42.5 257.4 50.0 26.2 5.1 12.6 2.4
1976 523.9 212.0 40.5 269.1 51.4 30.4 5.8 12.4 2.3
1977 530.9 219.4 41.3 270.2 50.9 27.6 5.2 13.7 2.6
1978 536.7 226.3 42.2 269.3 50.2 28.6 5.3 12.5 2.3
1979 534.2 236.1 44.2 257.4 48.2 27.8 5.2 12.9 2.4
1980 492.3 225.6 45.8 230.4 46.8 24.3 5.0 12.0 2.4
1981 4IT.T 230.6 48.3 212.3 44.4 22.7 4.8 12.1 2.5
1982 448.0 230.6 51.5 184.2 41.4 20.7 4.6 12.5 2.8
1983 416.5 223.7 53.7 159.3 38.3 22.2 5.3 11.3 2.7
1984p 416.0 234.8 56.5 146.6 35.2 23.6 5.7 11.0 2.6
P = Preliminary

Source: Transportation Policy Associates, Transportation in America; Supplement to the 3rd Edition, Washington, D.C: July
1985, p.13.


REFERENCES

Alcohol Week, various issues.

Wayne Alexander, Staff of the Trade Subcommittee of the House Ways and Means
Committee, August 19, 1985.

American Petroleum Institute.

D. Atkinson, Distribution of Methanol as a Transportation Fuel. Prepared for U.S.
Environmental Production Agency, June 1982.

Bonner and Moore Management Science, Impacts of Alcohol Fuels on the U.S. Refining
Industry, Volume I, August 1983.

Peter Busowski, Aleohol Week, August 5, 1985.
Congressional Quarterly, Inc., Energy Policy, 2nd Edition, March 1981.

Congress of the United States, Office of Technology Assessment, Gasohol: A Technical
Memorandum, 1979. as

"Current Prices of Chemicals and Related Materials," Chemical Marketing Reporter,
July 1984 to June 1975.

Department of Energy, Energy Information Administration, Monthly Energy Review,
DOE/EIA-0035, various issues.

Department of Energy, Energy Information Administration, Petroleum Marketing Mon-
thly, DOE/EIA-0380, July 1982 to March 1985.

Department of Energy, Energy Information Administration, Petroleum Supply Monthly,
DOE/EIA-0109, December 1984.

Department of Energy, Office of Alcohol Fuels, Annual Report to the President and the
Congress, December 1984.

Department of Energy, Office of Alcohol Fuels, Fourth Annual Report on the Use of
Alcohol in Fuels, March 1983,

Department of Energy, Office of Alcohol Fuels, Production Incentives, April 1985.

Department of Energy, Office of Alcohol Fuels, Sixth Annual Report on the Use of
Alcohol in Fuels, April 1985.

Department of Labor, Bureau of Labor Statistics, Producer Prices and Price Indexes,
January 1981, January 1985.

Department of Labor, Bureau of Labor Statistics, Wholesale Price Indexes, 1975-1984.
Department of Transportation, 1981 Carload Waybill Statistics: Territoria) Distribu-
tion, Traffic, and Revenue by Commodities Classes, February 1983.

16



Pipelines are concentrated near highly populated areas and refinery centers, especially
in the East, Gulf Coast, and Midwest (Exhibit 3-3). In length, they range from a few
miles to a few thousand miles, and in diameter from 4 to 58 inches. The minimum
batch size on a given pipeline may be as little as 5,000 barrels or as much as 75,000, as
set by the pipeline company.

Pipeline acceptance of a gasoline product is sometimes based on the concept of
“fungibility,” the ability to treat gasolines supplied by different producers as identical.
Thus, when a pipeline operating on this basis agrees to deliver product, it agrees to
deliver a barrel ike in quality to the one received from the producer, but not
necessarily the same berrel. For each product, the pipeline operator develops a
specification that must be met by shippers. Other pipelines offer "segmentation" of
product, agreeing to deliver the same barrels provided by the shipper to the destination.

The limited demand for sub-octane blends to date, combined with the emphasis on
quality control (which can more easily be compromised in a small volume shipment), has
prevented pipelines from accepting sub-octanes for transportation in the past. With a
recent announcement by Wilkams Brothers Pipe Line that it is prepared to begin
transporting sub-octane leaded regular, this impediment to the widespread use of this
type of gasoline in ethanol blending may begin to be less important. The company
operates a pipeline system based on fungibility in twelve midwestern states that moves
product from refineries and junctions with other pipeline systems to 41 company-owned
terminals, and off-line to 85 shipper-owned facilities. After considerable discussion
with its shippers regarding their plans for meeting octane requirements under lead
phasedown Wiliams Brothers elected to establish e regular leaded sub-octane grade and
to expand its terminal ethanol blending facilities. In October 1985, the company began
handling an 85 sub-octane leaded at eight terminals. The specification for the sub-
octane is the same as that for 88 octane regular leaded grade, except that the (R x M)/2
octane number specifies a minimum of 85. A sub-octane unleaded regular grade may
also be established in mid-1986 if demand materializes.” Colonia! Pipeline, the nation's
largest pipeline company, is considering a similar proposal.

J Atkinson, op. cit., p. 1.

2 Industry information obtained through interviews with pipeline companies and the
American Petroleum Institute.

ay, L. Teel, "Sub-Octane and Oxygenated Fuels in Wilkams Pipe Line Company."
Presented to the 1985 National Conference on Alcohol Fuels, Washington, D.C.,
September 1985.

Sindustry information obtained through discussions with pipeline companies.

37


the terminal that may change. The effects will vary depending on the current
transportation mode used and the level of demand for the special blend.

For refiners currently transporting gasoline by pipeline, two requirements must be met
if pipelines are to continue to be used for special blends: 1) the pipeline operator must
be willing to accept the special blend, and 2) the shipments of the special blend must
exceed the minimum batch requirements for the pipeline. Programs for transporting
sub-octane blends for mixing with ethanol have been recently initiated by Colonial
Pipeline, the largest pipeline operator in the United States, and by Williams Brothers
Pipe Line Company, a medium-sized company. These initiatives indicate pipeline
companies will also be willing to carry the special blends.”

The second criteria, achieving the minimum batch size, may be more difficult to meet.
Minimum batch sizes range from 5,000 to 75,000 barrels, depending on the diameter of
the pipeline; the typical minimum batch is 25,000 barrels. Assuming monthly
shipments, demand for the special blends must exceed 2.5 million to 37.8 million gallons
per year (2.8 to 42.0 million barrels of gasohol). This does not mean, however, that
demand for each refiner's special blend must exceed this level at each of the terminals
to which he delivers. In some cases, individual refiners can combine their shipments
with those of other refiners in order to achieve the minimum batch. In addition, most
pipeline operators permit multiple delivery points for a single batch. Thus, the
shipment volumes required between a given refiner and terminal may be substantially
less than the pipeline operator's minimum batch size.3 Where the necessary volumes
are not achieved, consolidation of special blend distribution and ethanol blending (i.e.
refiner or terminal exit from the market) will be necessary if gasoline is to continue to
be transported by pipeline. Otherwise, special blends will shift to alternative modes.

For refiners currently using water transportation, the analysis is similar. Minimum
barge shipments range from 4,000 to 12,000 barrels. Assuming monthly shipments, this
would correspond to annual gasohol demand of 2.2 to 6.6 million gallons. Where demand
proves insufficient for barge transportation, the refiner will likely turn to tank trucks.

_

For purposes of the following scenarios, it is assumed that the shipping method
eurrently used to move motor gasoline to a given terminal is the most economical
method available and that, consequently, the shipper will want to continue to use that
method if possible for specially blended gasoline.

2 industry information obtained through interviews with pipeline companies.

3ipid,

52


it4

EXHIBIT 2-1

EFFECT OF CHANGES IN STATE TAX EXEMPTIONS FOR GASOHOL IN SELECTED STATES

State Tax Exemption Gasohol Seles (thousand gallone) Gasohol Market Share (perrent)
Date of Tax 6 Month Period 6 Month Period 6 Month Period 6 Month Period
State Exemption Change _ Before Change __ After Change Before Change_ After Change —-_ Before Change_ After Change Difference
Louisiane 7-12-84 8e/gal. 16e/gat 0 24,424 9 2.3 42.3
Uteh T-1-84 Se/gal. 0 25,243 619 7.3 0.2 7
Wyoming 171-84 4e/gal. 0 101 187 0.t oO ty)
California 12-31-83 3% 9 223,695 255,750 4.8 45 0.1
‘Minnesota 1-1-83 0 2e/gal. 0 2,126 0 0.2 40.2

Sources: Office of Alcohol Fvels, Sixth Anal Report on the Use of Aleshol in Fuels, April 1985, pp. 6-81 Office of Alcohol Fuets, Fourth _Anwel Ri rt on the Use of
Alcohol in Fuels, March 1983, pp. 6-14; and Energy Informa’ ministration, Petroleum Marketing Monthly, July 1982 thr: ember .


EXHIBIT 4-1:
SCENARIO 1

Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles
Terminal Demand for Gasohol = 50,000 barrels per month

Base Case:

Alternative A:

Alternative B:

Terminal Blending of Gasohol with Standard Gasolines

Transportation of Gasoline from Refinery to Terminal by Pipeline

Transportation of Ethanol from Ethanol Plant to Terminal by Average
of Rail and Truck Rates

Transportation Costs:
Gasoline: 1.2¢ per gallon; $22,680 for 45,000 barrels
Ethanol: 5.025¢ per gallon; $10,553 for 5,000 barrels
Total: $33,233

Terminal Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasoline from Refinery to Terminal by Pipeline
Transportation of Ethanol from Ethanol Plant to Terminal

by Average of Rail and Truck Rates

Transportation Costs:
Gasoline: 1,2¢ per gallon; $22,680 for 45,000 barrels
Ethanol: 5.025¢ per gallon; $10,553 for 5,000 barrels
Total: $33,233
Impact: None

Comment: No transportation cost change since no change
in modes, volumes, or distances.

Refinery Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery

by Barge

Transportation Costs:
Ethanol: 3.0¢ per gallon; $6,300 for 5,000 barrels
Gasohol: 1.55¢ per gallon; $32,550 for 50,000 barrels
Total: $38,850

Impact: Cost Increase of $5,617 Over Base Case and
Alternative A

Comment: ‘Transportation cost increases because gasohol
must travel by more expensive mode, barge,
than gasoline. Increase here is greater than
cost savings realized in ethanol transportation.
Ethanol transportation cost savings result
from consolidation of shipments permitting
use of less expensive mode, barge.

55


the refinery to the terminal shifts from pipeline to truck. Actual increases are
expected to be much smaller because shifts in transportation mode for gasoline and
gasohol may not be necessary or may be less costly than shifting from pipeline to truck
as in the example above.

5.1 BLENDING LOCATION

The factors influencing the choice of a gasohol blending location are the same for
gasohol composed of 5 percent ethanol as for gasohol composed of 10 percent ethanol.
These include the total demand for the fuel, the location of the terminal and the
ethanol plant relative to the refinery, the transportation modes available, and the
technical factors (and associated costs) related to reducing or eliminating contamina-
tion of the gasohol.

The advantages and disadvantages of refinery, terminal, and service station blending
were presented in Chapter 4. The conclusions reached after analysis of these
advantages and disadvantages are the same for 5 percent blends as for 10 percent
blends. Assuming that testing requirements for the blended gasohol are not extensive,
most producers will continue to blend gasohol primarily at the terminal. Some refiners
and ethanol producers who are in close proximity, however, may choose to blend at the
refinery due to reduced transportation costs (Section 5.3). The number in this category
is likely to be small, however. Furthermore, given other costs associated with refinery
blending, such as the cost of adapting existing refinery storage facilities to ethanol or
gasohol storage and the cost of preventing water contamination of the fuel for a longer
time and/or distance, few gasohol marketers are likely to choose refinery blending.

5.2 TRANSPORTATION MODE

A requirement that gasohol be composed of 5 percent ethanol rather than 10 percent
ethanol could change the transportation modes used to move gasoline, ethanol, and
gasohol. These changes will depend upon the blending location and the respective
volumes of each fuel. In the following sections, the logistical considerations affecting
modal choice are examined for both terminal and refinery blending. Cost impacts are
examined in Section 5.3.)

ler purposes of the following scenarios, it is assumed that the shipping method

currently used to move motor gasoline to a given terminal is the most economical
method available and that, consequently, the shipper will want to continue to use that
method if possible for specially blended gasoline.

64


CHAPTER 1

INTRODUCTION AND SUMMARY

Waivers currently exempt ethanol blends from volatility controls such as Reid Vapor
Pressure restrictions. As a@ result, ethanol (in volumes of up to 10 percent in unleaded
gasoline) may currently be added to any legal gasoline to form an ethanol blend. If
regulations are implemented requiring gasoline to be specifically blended for ethanol
addition as a means of controling evaporative hydrocarbon emissions, changes in the
ethanol, gasoline, and gasohol marketing and distribution systems may result. This
analysis evaluates potential adjustments in these distribution systems. The report
includes the following:

e An overview of the domestic fuel ethanol industry, including detailed
analyses of supply, demand, pricing, tax incentives, and other current
issues affecting the market.

e An overview of present fuel ethanol distribution and blending practices,
ineluding analyses of transportation costs, gasohol distribution, the in-
fluence of state tax incentives and exchange agreements, and the
relationship between the fuel ethanol distribution system and the gasoline
distribution system.

e An evaluation of the effects of volatility control on the logistics and costs
of ethanol distribution and blending practices for 10 percent ethanol
blends.

e An evaluation of the effects of volatility control on the logistics and costs
of ethanol distribution and blending practices for 5 percent ethanol blends
(i.e., if mid-range volatility control imits the maximum ethanol content
in gasoline to 5 percent).

Severa] assumptions of the analysis should be noted. Most importantly, effects of the
proposed blending requirements on demand for gasohol were not analyzed. Gasohol
demand in the 10 percent blending scenario was assumed to remain constant; demand in
the 5 percent scenario doubles. (The latter results from holding ethanol demand


companies are small enough to be able to blend when it is profitable and to stop
blending when it is not. They are used to squeezing the extra 1/2 cent to 1 cent of
margin out of each gallon sold. Unlike major dealers and small jobbers, they are not
restricted by comingling or labeling requirements as they have substantial private brand
and unbranded business. Furthermore, they usually have sufficient market power to
influence refiners who do not favor ethanol blending.

The Physical Distribution System

Ethanol and gasohol are transported by barge, rail, and tank truck. Shipments from the
producer to the terminal may be by any one of these means, or may combine two or
more modes.2

Published statistics are not available describing the market shares of each mode.
However, a few comments can be made based on interviews with individual producers
and industry analysts.

e Water transportation, the least costly means of shipping ethanol or
gasohol, is a primary source of ethanol transportation in the Midwest.
Barge movements account for as much as 50 to 80 percent of the
movements from the ethanol producer to the terminal in this region.
Water transportation is of little importance in the transportation of
domestic product in other regions of the country.

e The distance the ethanol travels from the producer to the terminal
determines whether rail or tank truck will be used. Rail transportation
becomes attractive when trips exceed 200 to 300 miles.

e Distances from the ethanol plant to the terminal vary considerably. The
average distance from the plant to the terminal cited by individual
producers ranges from 100 to 700 miles, with 200 miles a common
estimate. Actual distances cited range from 9 miles to more than 1,000
miles.

lxenneth A. Doyle, op. cit.

2 Harold, op. eit., pp. 769-772.

44


buyers. In other cases, the ethanol terminal is entirely separate from a gasoline
distribution facility, and may be as many as 25 to 50 miles away. Generally, a
purchaser arrives with a tank truck that will be 90 percent filled with gasoline and 10
percent with ethanol. Some buyers fill their truck tanks solely with ethanol, which may
be taken to another terminal for blending, or blended at the retail outiet.!

Ethanol blending occurs for two reasons — to increase the margin which the gasoline
marketer can earn on a grade of fuel, and to increase the octane value of a sub-octane
grade to a marketable level. The impetus of the former reason is strongly dependent on
the level of the state tax exemption, as ethanol blending is not usually profitable when
only the federal tax exemption is available. The latter reason is related to the desire of
refiners to earn lead credits in the face of lead phasedown, as well as the desire to take
advantage of tax incentives so as to earn a higher margin on each gallon of fuel sold.2

The type of gasoline with which the ethanol is blended depends upon the level of the
state tax exemption. In those states where the state tax exemption is one cent or more
per gallon of gasohol, ethanol is blended with unleaded regular and premium gasolines,
leaded regular gasoline, and sub-octane gasolines from each grade. The resultant blends
are marketed as premium (or super) grade fuels and as regular grade fuels. In states
where the state tax exemption is less than one cent per gallon of gasohol, ethanol is
blended primarily with 87 octane unleaded to produce a 90 octane premium gasohol.?

In states where the tax exemption is one cent or more per gallon of gasohol,
ethanol/gasoline blends constitute 20 to 25 percent of the market for each grade of
gasohol, i.e. unleaded regular, unleaded premium, and leaded regular. In these states,
the gasohol market share of each grade of ethanol blend is approximately the same as
the market share for that grade of gasoline in the gasoline market.4 Thus, it is
estimated that 44 percent of ethanol blends sold nationally in 1984 were leaded regular
blends, 46 percent were unleaded regular blends, and 10 percent were premium blends.®

lindustry information obtained through interviews with ethanol producers, oil refiners,
pipeline companies, industry associations, and other industry analysts.

2 Discussions with various industry representatives.

3personal communications with Mr. Bob Reynolds, Manager, Marketing Department, New
Energy Company of Indiana, October 9, 1985.

‘ibid,

5.

Petroleum Marketing Monthly, U.S. Department of Energy, Energy Information Admini-
stration, June . Pp» 16.

42


EXHIBIT 5-2:
SCENARIO 2

Distance from Refinery to Terminal = 50 miles
Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles

Base Case:

Alternative A:

Alternative B:

Terminal Blending of 10 Percent Ethanol with Standard Gasoline
Ethanol Blend Demand = 50,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck

Transportation Costs:
Gasoline: 0.155¢ per gallon; $2,930 for 45,000 barrels
Ethanol: 2.94¢ per gallon; $6,174 for 5,000 barrels
Total: $9,104 for 50,000 barrels
Average: 0.43¢ per gallon

Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 100,000 barrels per month

Transportation of Gasoline from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Terminal by Truck

Transportation Costs:
Gasoline: 0.155¢ per gallon; $6,185 for 95,000 barrels
Ethanol: 2.94¢ per gallon; $6,174 for 5,000 barrels
Total: $12,359 for 100,000 barrels
Average: 0.29¢ per gallon

Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case because the
proportion of gasoline in the blend increases,
and gasoline costs less to deliver than ethanol.
No change in modes.

Refinery Blending of 5 Percent Ethanol with Specially Blended
Gasoline

Ethanol Blend Demand = 100,000 barrels per month

Transportation of Gasohol from Refinery to Terminal by Barge

Transportation of Ethanol from Ethanol Plant to Refinery by Barge

Transportation Costs:
Gasohol: 0.155¢ per gallon; $6,510 for 100,000 barrels
Ethanol: 0.375¢ per gallon; $788 for 5,000 barrels
Total: $7,298 for 100,000 barrels
Average: 0.17¢ per gallon

Comment: Transportation cost per gallon of gasoho) falls
in comparison to the base case and Alternative
A because consolidation of ethanol shipments
permits use of a less expensive mode, barge;
because ethanol is shipped a shorter distance
to the refinery than to the terminal; and
because gasohol is shipped by the same mode
as gasoline (barge).

67


at

NONBEVERAGE CONSUMPTION OF ETHANOL, 1979-1984
(million gallons)

1979 1980 19st 1982 1983 i986
Volume = Percent Volume Percent Volume Percent Youme Percent Volume Percent Yotume Percent

Fuel Use 20 8.0 6s 23.5 5 24.0 230 53.7 433 67.9 570 1
Solvent 14 43.8 198 38.3 109 31.8 100 23.4 inst 18.4 tot at
‘Chemicnl Peedstock 107 42.8 26 w.6 34 32.6 %0 a1. sol 14.1 sol ats
Exports 9 3.6 14 2.6 10 3.5 8 1.9 rol 1.8 io! 13

1

Estimated from SRI projections.

Sources: 1981 to 1984 fuel statistics from Migdon R. Segel, “Gasohol: The Alcohot Fuels." Prepared for Congressional Research Service, July 12, 1985, p. 6. Other
statistics from Thomas F. Killilea, SRL, "Marketing Research Report: Ethyl Alcohol,” Chemical Economies Handbook, May 1983, pp. 644.5922 P-Q, 644.50231.


Transportation costs could change in the event of either terminal blending or refinery
blending. In the refinery blending case, costs could either increase, decrease, or stay
the same. A decrease in ethanol transportation costs would occur if large, less frequent
shipments to the refinery replaced high cost, smaller shipments to numerous terminals,
Such benefits could arise when the plant is nearer to the refinery than to some
terminals or more economical modes of transportation become available. These cost
savings, however, could be offset by the higher cost of transporting the gasohol to the
terminal if the standard gasoline used in terminal blending had previously been moved
by pipeline. In the terminal blending case, costs could either increase or stay the same.
Transportation costs for gasoline will increase if there is a modal shift and there would
be no reduced ethanol transportation cost to offset them.

Examples of the potential impacts on transportation costs of special gasoline blending
requirements, with blending performed at either the terminal or the refinery, are
provided in Exhibits 4-1 to 4-4. Assumptions underlying these analyses are listed below:

1) Batch minimums are 25,000 barrels for pipeline (1,050,000 gallons); 8,000
barrels for barge (336,000 gallons); 595 barrels for rail (25,000 gallons);
and 119 barrels for truck (8,000 gallons). In order to determine the
maximum cost increases, these minimums were assumed to be required of
shipments between any given refiner and terminal location.

2) Shipments of the ethanol, special blends, and gasohol are made at least
once a month.

3) The cost of gasoline transportation is 0.24¢ per gallon per 100 miles by
pipeline; 0.31¢ per gallon per 100 miles by barge; and 1.18¢ per gallon per
100 miles by truck.

4) The cost of ethanol transportation is 0.75¢ per gallon per 100 miles by
barge; 2.94¢ per gallon per 100 miles by truck; and 3.76¢, 5¢, and 6.5¢ per
100, 200, and 300 miles, respectively, by rail.

5) Terminal blending scenarios assume there is no impact on transportation

costs from the ethanol producer to the terminal since the terminal will
probably continue to be supplied by the same ethanol producer,

54


Given the gasoline transportation costs presented at the beginning of this chapter,
shifting from pipeline to truck increases the gasoline transportation cost by 0.94 cents
per gallon per 100 miles; shifting from barge to truck increases gasoline transportation
costs by 0.87 cents per gallon per 100 miles. The maximum average cost increase per
gallon of gasoline per 100 miles, therefore, is 0.9134 cents (equal to (0.94)(0.62) +
(0.87)(0.38)). Sinee gasoline constitutes 90 percent of the gasoline/ethanol blend, and
since the cost of transporting the ethanol to the terminal does not change with terminal
blending, the maximum cost impact on a gallon of gasohol at the terminal is an increase
of 0.82 cents per gallon for every 100 miles that the special gasoline is shipped to the
terminal (equal to (.90)(0.9134) + (.10)(0)). The total maximum cost impact, then,
depends on the gasoline shipping distance.

In the case of refinery blending, several opposing cost factors must be considered.
Since gasohol will not move by pipeline in 1990 due to limited market penetration, the
cost of delivering the gasohol to a terminal will rise if the gasoline previously blended
with ethanol was transported by pipeline. Assuming that the gasoline previously shipped
to terminals for blending was shipped by pipeline and barge in proportions equal to those
shown in Exhibit 3-2 for 1984 (62 percent and 38 percent, respectively), and that all
gasohol blended at refineries is shipped by truck, the maximum cost increase will be
0.91 cents per gallon of gasohol per 100 miles. These costs may be offset partially or
totally if the ethanol plant is much closer to the refinery than to the terminal. The
largest potential for cost savings in this case, however, occurs when the ethanol
producer is able to realize economies of scale in transportation costs by shipping to one
point (a refinery) rather than to multiple points (terminals). The net result will depend
upon the individual circumstance.

Since it is probable that terminal blending of gasohol will dominate refinery blending in
1990, total transportation costs are likely to increase with special blending. This is
because terminal blending does not offer as many opportunities for transportation cost
savings as refinery blending, and then only if market consolidation occurs and ethanol
producers realize economies of scale in transportation costs by shipping product to
fewer terminal locations.

4.4 EFFECTS ON MARKET RELATIONSHIPS AND TRANSACTION COSTS

Terminal blending of special gasoline with ethanol will not affect existing business
relationships in the ethanol/gasohol distribution system, and therefore should not affect


vr

avd

EXHIBIT 2-5:

MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE

ony omy

JANUARY 1982

aN
ay

‘eone

a
oe

oy

oc

we
Distaee,
e

ae
|


TABLE OF CONTENTS

SECTION
1 INTRODUCTION AND SUMMARY ....- se eee
2 INDUSTRY PROFILE .... .- eee ee ee ew
. SUPPLY. 2... we ee ee ee ee eee
DEMAND .....- ee .

prprp
OrwoOne

Seee
ROD

ETHANOL DISTRIBUTION AND BLENDING

ETHANOL PRICING. .... .- see ewe

GASOHOL PRICING. ..... see ee ee

CURRENT ISSUES ... 1 eee eevee

THE GASOLINE DISTRIBUTION SYSTEM ...-. -

ETHANOL AND GASOHOL DISTRIBUTION . .
TRANSPORTATION COSTS .... 2-6.
STATE TAX INCENTIVES AND

EXCHANGE AGREEMENTS ...- +. ee ee

IMPACT OF SPECIAL BLENDING REQUIREMENTS

FOR ETHANOL BLENDS ON THE
DISTRIBUTION SYSTEM. ...- + ee ees

BLENDING LOCATION .. 1... eee ee eee

TRANSPORTATION MODES........
TRANSPORTATION COSTS .......--
EFFECTS ON MARKET RELATIONSHIPS AND

TRANSACTION COSTS .. 2 6 ee eee eee

STORAGE AND EQUIPMENT ISSUES ... .

IMPACT OF REDUCING THE ETHANOL

CONTENT OF GASOHOL TO 5 PERCENT . . .

BLENDING LOCATION .. 1... 22-26
TRANSPORTATION MODE. ...++-+.-
TRANSPORTATION COSTS ....- .
EFFECTS ON MARKET RELATIONSHIPS AND

TRANSACTION COSTS .... + ee eee

STORAGE AND EQUIPMENT ISSUES ... .

REFERENCES . «see eee ee ee eee

APPENDIX A. 6 6 eee ee ee ew ee eh ee

il
26
26
30
33
33
41
45

46

47
48
51
53

60
61

63
64
64
65
13
15
76

79


se

EXHIBIT 3-1:
GASOLINE DISTRIBUTION SYSTEM?

MANUPACTURE NUOLERALE RETAIL
| MAJOR REFINER/SUPPLIER
OPERATED OUTLET
MAJOR BRANDED JOBBER —e) BRANDED CONTRACT
IREFIN ER/SUPPLIER a a = DEALER OUTLET
COMMISSION,
AGENT BRANDED LESSEE
DEALER OUTLET
BRANDED JOBBER OUTLET
PRIVATE BRANDED PRIVATE BRANDED
JSOBBER, SS DEALER OUTLET
PRIVATE BRANDED
INDEPENDENT > JOBBER OUTLET
IREFINER/SUPPLIER
INDEPENDENT REFINERS
SUPPLIER OPERATED OUTLET

1 . A
For further information on the gasoline distribution system, see Jack Faucett Associates, Gasoline Price Data Systems.
Prepared for Economic Regulatory Administration, U.S. Department of Energy, 1980.

Source: DHR, inc., op. cit., p. D-2.


DHR, Inc., Phase I: Methanol Use Options Study; Volume III, Appendix D, "Transporta-
tion and Distribution of Methanol Fuels." Prepared for the U.S, Department of
Energy, May 1, 1981.

E.E. Ecklund, "Status and Directions of the Use of Alcohols and Other Oxygenated
Hydrocarbons in North America," VI International Symposium on Alcohol Fuels

Technology, May 1984.
General Accounting Office, Potential of Ethanol as a Motor Vehicle Fuel, June 3, 1980.

Federal Register, Vol. 50, FR 2615 (January 17, 1985)

Federal Register, Vol. 50, FR 9386 (March 7, 1985)

John Gordley, Staff of Senator Robert Dole, August 12, 1985.

David E. Hallberg, "Testimony Before the Subcommittee on Energy Conservation and
Power of the Committee on Energy and Commerce, U.S. House of Representa-
tives," June 28, 1983.

Larie W. Harold, "Distribution Options for Alcohol Fuels," Fuel Alcohol: An Energy
Alternative for the 1980's: Ay dix. Final Report, U.S. National Alcohol Fuels
Commission; Washington, Dot TSE,

Herman and Associates, July 1985.

Herman and Associates, Survey of Federal and State Alcohol Fuel Regulations, July
1985.

R.W. Hooks, R. Sagawe, "Gasoline Fuel Distribution and Handling Trail,” Proceedings of
the Third International Symposium on Alcohol Fuels Technology, May 1979.

Jerry Hurley, Transportation Section, American Petroleum Institute, August 22, 1985.
Information Resources, Inc., Alcohol Outlook, various issues.
Information Resources, Inc., Alcohol Update, various issues.

Thomas F. Killilea, et. al., Stanford Research Institute, "Marketing Research Report:
Ethyl Alcohol," Chemical Economics Handbook.

Salvatore Lazzari, Congressional Research Service, Federal Tax Provisions Relating to
Alcohol Fuels Including Recent Changes Under the Tax Reform Act of 1984,
November 6, 1984.

Jay Matley, "CE Plant Cost Index — Revised," Chemical Engineering, April 19, 1982.

Mueller Associates, Inc., Gasoline Octane Enhancement: Technology, Economies and
Environmental, Health and Safety Considerations, July 1985.

National Petroleum Council.

Migdon R. Segal, Congressional Research Services, Gasohol: The Alcohol Fuels, July
12, 1985.

77


EXHIBIT 2-9:

FEDERAL GASOLINE EXCISE TAX AND ALCOHOL BLEND TAX INCENTIVES
(cents per galion)

Excise Tax Exemption! 2

Motor Fuel For Alcohol Blends Income Tax Credit
Year Excise Tax (cents per gallon of gasohol) (cents per gallon of ethanol)
1978 4 0 0
1979 4 4 0
1980 4 4 40
1981 4 4 40
1982 9 5 50
1983 9 5 50
1984 9 5 50
1985 9 6 60

lior gasoline blended with a minimum of 10 percent alcohol of at least 190 proof and
manufactured from renewable resources.

2 Credit is per gallon of ethanol of at least 190 proof instead of per gallon gasohol.
Cannot be taken if excise tax exemption is taken. A smaller income tax credit is
available for 150 to 190 proof ethanol.

Sources: Salvatore Lazzari, Congressional Research Service, Federal Tax Prov-
isions Relating to Alcohol Fuels Including Recent Changes Under the Tax
Reform Act of 1984. November 6, 1984, pp. 5-8; Thomas F. Rililea,
Stanford Research Institute, "Marketing Research Report: Ethyl Alco-
hol," Chemical Economics Handbook, May 1983, p. 644.5021I, and Con-
gressional Quarterly, Inc., Energy Policy, 2nd Edition, March 1981, pp.
201, 223-235.

23


JACK FAU-85-322-6

THE EFFECT OF GASOLINE VOLATILITY CONTROL
ON SELECTED ASPECTS OF ETHANOL BLENDING

Final Report
Work Assignment 6-1
Contract No. 68-03-3244

Submitted to:

U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Mobile Sources
Ann Arbor, Michigan, 48105

November 4, 1985

JACK FAUCETT ASSOCIATES

5454 WISCONSIN AVENUE - SUITE 1155
CHEVY CHASE, MARYLAND 20815

(301 687-6223


CHAPTER 4

IMPACT OF SPECIAL BLENDING REQUIREMENTS
FOR ETHANOL BLENDS ON THE FUEL DISTRIBUTION SYSTEM

Waivers currently exempt ethanol blends from ASTM volatility specifications. As a
result, ethanol may be added to any legal gasoline to form an ethanol blend which may
be more volatile than the base (alcohol-free) gasoline. In the future, it may be
necessary to control the volatility of ethanol blends to reduce automotive evaporative
hydrocarbon emissions. This would mean that instead of adding ethanol to any legal
gasoline, gasoline would have to be specifically blended for ethanol addition. This
ehapter examines the effects of such a change on the logistics and costs of ethanol
distribution and blending practices. Among the issues addressed are:

e Where will the ethanol be blended into the gasoline?

e What transportation modes will be used for shipping the specially blended
gasoline, ethanol, and gasohol?

e What will be the effect on transportation costs of the change?

r What changes may take place in relationships between ethanol producers,
refiners, and terminal operators? What will be their cost?

e What storage or equipment issues may arise as a result of the change in
blending practices?

The results of the analysis indicate that with special requirements for the gasoline
blended with ethanol, if gasohol is blended at the terminal, transportation costs will
increase by & maximum of 0.82 cents per gallon of gasohol for every 100 miles that a
special gasoline is shipped to the terminal. If gasohol is blended at the refinery,
transportation costs will increase by a maximum 0.91 cents per gallon of gasohol per
100 miles. However, several constraints of the study should be noted in interpreting
these findings. First, the effects of the proposed blending requirements on demand for

al


percent cosolvent alcoho! with a maximum of 3.7 weight percent oxygen in the finished
fuel. The cosolvent alcohol could be one or a mixture of ethanol, propanols, and
butanols. Existing ASTM volatility standards for gasoline would need to be met, as well
as specifications for maximum temperature for phase separation. Due to potential
increases in evaporative emissions with the use of such a fuel, EPA attached certain
conditions to the waiver before granting it. The major condition is an Evaporative
Index standard — a function of Reid Vapor Pressure, fraction distilled at 200 degrees
Fahrenheit, and fraction distilled at 100 degrees Fahrenheit. Also, fuel blended with
DuPont blendstock may not be used as a base gasoline to blend with other oxygenates,
such as alcohols and ethers, and alcohol purity specifications must be met.

Some members of the energy industry consider the terms of the DuPont waiver to be
restrictive, and so blenders and refiners have been slow initially to begin blending
methanol and ethanol into gasoline according to the terms of the DuPont waiver.
However, the potential demand for ethanol as a component of DuPont waiver blends is
large. The DuPont waiver blend is a less expensive octane-boosting gasoline additive
than blending gasoline with pure ethanol, and could increase blenders' profit margins.”
Ethanol may be preferred to the propanols and butanols as a cosolvent alcohol in the
DuPont blend since ethanol blended in this proportion would be eligible for the blender's
federal income tax credit of $0.60 per gallon of ethanol. The DuPont blend may make
it possible to market ethanol] economically in states where there is no state tax
incentive for ethanol blends, particularly in the heavy population centers on the East
and West Coasts.?

Ethanol Legislation

At the federal level, both the tax subsidies for alcohol fuels and the duties on imported
fuel ethanol are subject to potential revision. Various state legislatures are also
considering legislation which will affect alcohol fuels regionally.

livol, 50, FR 2615 (January 17, 1985)
2ny.8, Fuel Alcohol Market Analysis," Alcohol Outlook, September 1984, p. 4.

Supp a DuPont Decision Seen Putting Ethanol in States Without Tax Breaks," Alcohol
Week, January 15, 1985, p. 2. eo

31




06

Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS

1g (1/1/89)

(1984)
_
QUALIFYING ALCOHOL EXEMPTION OR RESTRICTIONS AND
STATE (type and amount ) CREDIT QUALIFICATIONS STATUS
North Dakota 10% ethanol or 6¢ gallon must be produced from agri- Current law (3/20/79)
methanol CU/1/84 = cultural products Expires: 6/30/92
12/31/85)
4d gallon
(1/1/86 -
6/30/92)
Ohio ethanol or methanol | 35¢ gallon produced from other than Current law (7/1/81)
("tax forgive- natural gas or petroleum No expiration date
ness )
South Dakota 10% ethanol 4€ gallon must be derived from grain or | Current law (1979)
forest products produced in Expires: 6/30/85
the U.S.
Tennessee 10% ethanol 4d gallon blended with unleaded Current law (1/1/83)
gasoline Expires: 12/31/88
Texas 10% ethanol 5¢ gallon produced from renewable Current law (9/1/81)
hd (1/1/86) resources only Expires: 12/31/90
34 (1/1/87)
2¢ (1/1/88)

maximum credit: $10.8 million
total per year

in-state ethanol has first
priority in claiming exemption

reciprocity provided when
other states provide a similar
exemption

Kerman & Associates


slight, since California is a major market for imported ethanol that can be sold
profitably without a tax incentive. Furthermore, any growth in the federal tax subsidy
for alcohol fuels will have the effect of reducing or eliminating the state tax incentive
necessary to make gasoho] competitive, tending to reduce regional differences in
gasohol demand.

2.3 ETHANOL PRICING

Historically, ethanol prices have been significantly higher than gasoline prices, prevent-
ing the large-scale use of ethanol as a motor fuel (Exhibit 2-12). The recent marketing
of ethanol as an octane enhancer, the federal and state tax subsidies for alcoho} fuels,
and the escalation of gasoline prices in the 1970's and early 1980's have made ethanol
more competitive with gasoline. The current wholesale price for fermented fuel
ethanol is between $1.42 per gallon and $1.72 per gallon. The current price of gasoline
averages $0.82 per gallon wholesale, without taxes, and $1.199 per gallon retail.2”?
Thus, gasoline still holds a considerable price advantage over ethanol if factors such as
tax incentives are not accounted for. If the price of ethanol is adjusted for the federal
excise tax exemption on gasohol as shown in Exhibit 2-12, the net price of ethanol to
the blender becomes much lower. For example, the current federal excise tax
exemption on gasohol of 6 cents per gallon of gasohol reduces the net price of ethanol
by 60 cents per gallon of ethanol blended in a 10 percent concentration. Thus the net
price of fermented ethanol to a blender is $0.82 to $1.12 per gallon when the federal
tax exemption is taken into account. If the blender can take advantage of a state tax

exemption for alcoho) fuels, the net price of ethanol to the blender would be even
lower.

2.4 GASOHOL PRICING

Gasohol may be either regular unleaded gasoline blended with ethanol (a premium
blend), or ethanol which has been blended with a specially prepared leaded or unleaded
suboctane gasoline so that the octane rating of the blend qualifies it as a regular leaded

linformation Resources, Inc., Alcohol Outlook, May 1985, p. 3.

2 Energy Information Administration, U.S. Department of Energy, Petroleum Marketing
Monthly, March 1985, p. 43,

Energy Information Administration, U.S. Department of Energy, Monthly Energy
Review, June 1985, p. 98.

3

26


16

Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(1984)

QUALIFYING ALCOHOL

EXEMPTION OR

RESTRICTIONS AND

STATE (type and amount) CREDIT QUALIFICATIONS STATUS
Texas (con't.) quarterly pro-rated adjustment
made so limit 1s not exceeded
Utah ethanol or methanol 40¢ galion must be made of plant in Utah | Current law (1981)
tax rebate producing 1 million gallons and new revisions
per year or more and certified| Expires: 6/30/89
by the Utah Energy Office
Virginia 10% ethanol 8¢ gallon ethanol produced in-state from} Current law
6¢ (6/30/86) agricultural, forestry, or Expires: 7/1/92
4¢ (6/30/86) waste products at a plant
2¢ (6/30/90) not using natural gas or
petroleum as a primary fuel
Washington ethanol 16¢ gallon None Current law (1/1/80)
(tax credit) Expires: 12/31/86
Wisconsin 10% ethanol 4é gallon reciprocity for equal Proposed law
(with unleaded exemption, otherwise, (introduced 4/14/83)
gasoline) only Wisconsin products
qualify
Wyoming 10% ethanol 4¢ gallon "from agricultural products Current law (7/1/79)

or other renewable sources”

Expires: 7/1/84

Herman & Associates



EXHIBIT 2-3:
1984 ETHANOL IMPORTS, BY COUNTRY OF ORIGIN

Country Volume (Thousand Gallons)! Percent
Brazil 136,575 80.3
United Kingdom 10,652 6.3
Canada 7,318 4.3
Argentina 6,455 3.8
Spain 3,868 2.3
France 2,385 1.4
South Africa 1,616 0.9
Netherlands 896 0.5
Others” 279 0.2
TOTAL 170,045 100.0

Mineludes ethanol imported for nonfuel purposes.

2Other countries exporting ethanol were West Germany, Yugoslavia, Norway, Japan,
China, South Korea, and Mexico.

Source: "International Alcohol Outlook," Alcohol Outlook, March 1985, p. 14.

10


Although it is anticipated that no additional transportation stock will be needed to
move the specially blended gasoline, ethanol, and gasohol, it is possible that the usage
patterns of the available stock will change. For example, either terminal blending or
refinery blending may result in increased usage of the existing barge and truck fleets
and lower usage of pipelines by refiners. Similarly, refinery blending may increase the
usage of unit trains to deliver ethanol to the refinery, and reduce the usage of
individual tank cars to deliver ethanol to terminals. Changes in shipment destinations
could affect transportation company routings and the geographical distribution of the
transportation stock. These changes will have economic costs and benefits associated
with them. Although these will be transitional in nature, they may be significant.

62


M.D. Tindall, Gasohol —- Adding Octane to the Marketing Mix. Presented at the 1981
National Petroleum Refiners Association Annual Meeting, March 29-31.

Transportation Policy Associates, Transportation in America; 2nd Edition, Washington,
D.C: March 1984,

“Under EPA's Lead Phase~Down Will Ethanol Blends Save the Independents," Lundberg
Letter, November 9, 1984.

George H. Unzelman, "Problems Hinder Full Use of Oxygenates in Fuel,” Oil and Gas
dournal, July 2, 1984. O_O

Eric Vaughn, President, Renewable Fuels Association, August 19, 1985.

Steven B. Will, Social Cost of Alcohol Fuel Subsidies. Prepared for Argonne National
Laboratory, July 1982.

78


gasohol were not analyzed. Gasohol demand was assumed to remain unchanged. If
gasohol demand were to fall, the transportation cost increase would tend to be at the
high end of the maximums cited above, but would not exceed it. If gasohol demand
were to increase, the transportation cost would increase by less than the maximum
increase, and could even decrease.

Second, there is an implicit assumption that each refiner whose product is currently
blended with ethanol will produce the special gasoline blends; and that the specially
blended gasoline is mixed with the ethanol of the same producer and shipped to the
same terminals as was the case without special blending. This assumption has more
significant implications for the analysis. If, for example, a terminal that previously
offered ethanol ceases to accept it after the new requirements are imposed, an ethanol
producer who supplied that terminal may have to ship the product to a more distant
terminal. With truck and rail rates of 2.94 cents per 100 miles and 3.76 cents per 100
miles for ethanol, respectively, the cost impacts could be substantial. Analysis of this
aspect of special blending requirements is suggested as a refinement to the study.

4.1 BLENDING LOCATION

Ethanol may be mixed with specially blended gasoline at any of three locations: the
refinery, the terminal, or the retail outlet. At present, 90 percent of all gasohol is
blended at terminals by adding ethanol to a tank containing any legal gasoline. The
remaining 10 percent is blended primarily at the retail level. The regulatory action
proposed by EPA could change these blending practices if an alternative location
becomes more economical. Factors that will influence the choice of blending location
are discussed below.

Refinery Blending

Refinery blending of gasohol provides the best control for a correct blend. With
refinery blending, the blending is carried out by skilled operators under optimum
conditions. The laboratory facilities needed to test the fuel are already in place. The
ethanol producers would need to deliver their product to only one refinery location,
rather than to dozens of terminals. Finally, if volumes are large enough, the gasohol

1p. W. Hooks, R. Sagawe, "Gasoline Fuel Distribution and Handling Trial," Proceedings

of the Third International Symposium on Alcohol Fuels Technology, May 1979, p. 2.

48


control personnel. It is possible that a few simple tests could be performed on the
blended gasohol at a reasonable cost. However, any requirement (either self- or
government-imposed) that involves terminal testing could reduce the interest of
refiners in providing the specially blended gasoline.

Service Station Blending

The final option for blending ethanol with gasoline is the service station. One
advantage is the minimal risk of phase separation because of reduced time during which
the gasohol is exposed to water ingress.2 Only the alcohol portion of the blend would
have to be carefully guarded against impurities. The 90/10 blend percentage would be
virtually guaranteed by the gearing in the ratio-type service station blending pump.?

Disadvantages are significant. The distribution and storage costs would be higher for
this approach than for refinery or terminal blending. Installation of blending pumps at
every location would represent a sizable investment to any retailer,* and would entail
higher maintenance costs than standard pumps. There would be no opportunity for
routine lab testing. Also, storage of pure alcohol at the station would be complicated
by the more stringent safety practices associated with the fuel because of its different
flammability limits and fire foam compatibility in comparison to gasoline. Higher
insurance costs could result.

Conclusions

The choice of blending location will depend on the geographic availability of pipelines,
the proximity of the ethanol production facility to a refinery and to the market, and the
total demand for gasohol. The choice of location will also depend on whether there are
testing requirements for the blended fuel. For most producers, assuming demand is held
constant and testing requirements for the blended gasohol are not extensive, gasohol
will continue to be blended at the terminal. Key advantages to terminal blending are
that many refiners will be able to continue shipping specially blended product to the

mo

Harold, op. cit., p. 778.
Hooks, op. cit., p. I-32.
Harold, op. cit., p. 779.
‘Hooks, op. cit., p. I-32.
SHarold, op. cit., p. 779.

ix}

3

50


Fuel ethanol is marketed almost exclusively in 10 percent concentration as a component
of gasohol. In 1984, 5.7 billion gallons of gasohol were consumed, representing 5.5
percent of total gasoline consumption.7? This quantity of gasohol required 570 million
gallons of fuel ethanol for blending.

Demand for gasohol has a strong regional character related to the availability of
feedstocks for fuel ethanol production and state tax incentives for ethanol blending. In
certain states, the gasohol market share as a percent of total gasoline sales is nearly
five times the national average.? Market shares for gasohol by state since 1982 are
shown in Exhibit 2-5. Gasoho) sales volumes and market share by state for 1984 are
listed in Exhibit 2-6. From these exhibits it can be seen that gasohol sales are
particularly strong in the Midwest where corn, the primary feedstock for fuel ethanol,
is most readily available.

Although gasoline consumption is projected to fall from 102 billion gallons in 1984 to 86
billion gallons by 1990," demand for fuel ethanol as a blending agent in gasohol is
expected to continue to grow because ethanol, with current federal and state tax
incentives, is an economically viable subsitute for tetraethyl lead as an octane-boosting
component of gasolne.® Consequently, demand for fuel ethanol may reach as much as
920 million gallons in 1986, over 60 percent more than 1984 fuel ethanol demand.”

Ethanol Demand and Octane Enhancement

Fuel ethanol can be marketed in two ways: as an additive to finished gasoline, and as
an alternative to other sources of octane in standard gasolines. The former type of use,

Iyidgon R. Segal, CRS, op. cit., p. 6.

21984 gasoline consumption is from Energy Information Administration, U.S, Department
of Energy, Petroleum Supply Monthly, December 1984, p. 25.

Sn January Gasoline and Ethanol Blend Sales," Aleohol Outlook, May 1985, p. 7.

‘Energy Information Administration, Petroleum Supply Monthly, op. cit., p. 25.

Bonner and Moore Management Science, Impacts of Alcohol Fuels on the U.S. Refining
Industry, Volume I, August 1983, pp. 2-3.

Sone Environmental Protection Agency has required that the lead content in gasoline be
Phased down to 0.1 grams per leaded gallon of gasoline by January 1, 1986.

"Congressional Ethanol Caucus Seeks Senate Sponsor for EITC Extension," Alcohol
Week, May 13, 1985, p. 8.

13