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Title: Memo to the Docket Regarding Economics of Ethanol Blending and Refining Sector 

Flexibilities developed to support EPA decision on 2012 RFS volume waiver requests (EPAHQ-OAR-2012-0632)

Date: November 15, 2012

Introduction

This memo briefly examines the economics of blending ethanol into motor gasoline and some of 

the technical factors that refiners and blenders would consider when considering how a waiver of 

Renewable Fuel Standard (RFS) requirements might affect them. This memo was informed by 

various discussions and by comments from multiple stakeholders, including the Department of 

Energy, IHS, API, AFPM, Marathon Petroleum Company, and Chevron.

Ethanol’s Value to Blenders/Refiners

Domestic ethanol production in the United States has increased in the past 10 years, allowing 

greater quantities of ethanol to be blended into the gasoline pool. Ethanol’s widespread 

availability and blending economics have resulted in refineries modifying their operations to 

maximize the profitability of blending ethanol into gasoline, even exceeding the statutory

mandate for biofuels blending established in the Energy Independence and Security Act (EISA). 

Two components determine the blend value of ethanol to blenders/refiners. The first is ethanol’s 

“extender value”. As a gasoline extender, ethanol is expected to have approximately the same 

value as gasoline when blended into the gasoline pool at low levels (up to 10% or 15% by 

volume). We would expect blenders and refiners to continue the discretionary blending of 

ethanol as long as the value of the ethanol was greater than its cost. 

The second component is the “quality premium” that results because ethanol has a higher octane 

rating compared to regular unleaded gasoline (ethanol’s octane rating is 115, while finished 

regular gasoline’s octane rating is 87). Some blenders are likely to continue blending ethanol 

even if its cost should rise above its extender value depending on the cost of alternative high

octane blendstocks in the market. When ethanol’s price is below its maximum blend value in 

gasoline, refiners and gasoline blenders are able to earn an incremental margin for blending 

ethanol above ethanol’s extender margin.

Current Ethanol Utilization and Refiner Flexibilities

Over time, refineries have transitioned from primarily producing finished gasoline to primarily 

producing blendstocks for oxygenate blending (BOBs), which require the addition of high octane 

components (generally ethanol) in order to meet the specifications of finished gasoline. In 2005, 

refineries produced 60% finished motor gasoline in the U.S.; by 2011, that number was down to 

10%. An estimated 85% of the ethanol blended into the gasoline pool was “match blended” into 

blendstocks for oxygenate blending, or BOBs, while the remaining 15% was “splash blended” 

into finished gasoline1

. For match blending, octane and RVP are set with the anticipation that

ethanol will be blended downstream of the refinery.

 1 Finished gasoline is gasoline that meets all applicable regulatory or industry standards without requiring further 

blending or modification before it could legally be sold.
2

As a result, current refinery operations have evolved with the expectation that octane blending 

components will be readily available ex-refinery gate and that an unfinished (suboctane) gasoline 

will be produced at the refinery. However, refineries and refinery process units were developed 

during different engineering “eras”. In other words, there are existing refineries that were 

originally configured to produce finished motor gasoline at the refinery. As a result, refineries 

have responded to decreased demand for octane and high octane blend components through a 

series of operating and/or hardware changes that serve to maximize the individual refinery’s 

profitability. These refineries have adapted to the current era where high octane blending 

components are available at a discount, by altering operating parameters or idling process units. 

The options that refineries have available to increase gasoline octane involve a combination of

operating changes and hardware changes. The two types of changes differ greatly in the timeline 

for implementation: operating changes can be implemented in a matter of weeks and require a 

number of operational tradeoffs, whereas hardware changes could take several months to a year 

and generally require capital expenditures. Refineries could respond to a decrease in ethanol 

availability by increasing severity (operating temperature) of their catalytic cracking, 

hydrocracking, or catalytic reforming units, which would have an impact on the refinery’s 

product slate. In addition, provided that the refinery has idle capacity in upgrading units, they 

could increase the utilization of catalytic reforming, isomerization, and alkylation processes to 

produce higher octane blending components.

An example of an operational change that a refinery could undertake in order to increase octane 

of the finished gasoline product is to increase severity of their fluid catalytic cracking unit

(FCCU). At higher severity, additional gasoline blending components of mid-octane would be 

produced, as more energy is input into the process. However, increased gasoline production

would occur at the expense of distillate production, which has been a significant contributor to 

refinery profitability. Alternatively (or in addition), a refinery could increase utilization and 

severity of the catalytic reforming unit. Increasing severity of catalytic reforming would increase 

the octane number of the finished reformate, but would have a number of drawbacks. First, more 

energy would be required to run the process; second, the yield of co-products would be increased

at the expense of other, more valuable products; and third, the overall yield of reformate would 

be reduced. In the event there is available reformer capacity, increased utilization could help 

counteract some of the loss in reformate yield; however, increased utilization would only 

exacerbate the increase in energy use and co-product production.