E15 fuel announcement will backfire
The Biden administration has announced the suspension of the rule that prevented the sale of fuel containing up to 15% ethanol alcohol during the summer months. The current rack price (wholesale price) of a gallon of ethanol is about 75% of the rack price of a gallon of pure gasoline, so the retail price of E15 fuel should be cheaper than regular E10 fuel by about 10 cents per gallon, according to the White House. The additional ethanol will replace some petroleum-based fuel, which will slightly reduce the demand for crude oil and theoretically lower its price.
E15 (also known as Unleaded88) fuel sales have been banned from June 1 to September 15 because alcohol is more volatile than gasoline. The concern was that ethanol evaporates more readily than gasoline in the summer heat, and then the fumes contribute to smog.
President Trump issued an executive order to allow the sale of E15 during the summer to please farmers, but courts overturned the order. This time, President Biden had the EPA issue an emergency rule permitting summer sales of E15, but environmentalists may challenge this rule in court.
This new rule will have little effect on the overall price of fuel because less than one percent of the filling stations in the U.S. even offer E15. Stations have been reluctant to carry E15 since they couldn't sell it during the peak summer driving season. And many drivers were reluctant to buy it because vehicles older than 2001 cannot use E15 fuel, so consumer acceptance of E15 has been slow since it was first introduced in 2012.
Environmentalists pushed for renewable biofuels such as ethanol, and farmers were happy with the increased demand for corn, which raised the price of the crop. Iowa grows more corn than any other state in the Union, which is why President Biden went to Iowa to make the announcement.
Ethanol has less energy per gallon than gasoline, so fuel mileage is slightly less with a gasoline/ethanol mix, including the common E10 fuel. However, ethanol has higher octane than gasoline, so the alcohol serves another purpose in addition to reducing costs per gallon. And alcohol helps to oxygenate the fuel, which reduces air pollution from fuel combustion.
Another issue is the impact on food prices since corn is commonly used to produce ethanol. Corn futures prices are already rising because 1.5% to 2% fewer acres of corn are expected to be planted in the U.S. in 2022 due to the skyrocketing costs of fertilizer. Farmers will cut back on the use of fertilizer, reducing the yield per acre. Urea and ammonia are produced from natural gas, so the steep rise in the cost of natural gas has caused the price of these nitrogen fertilizers to more than double from last year. Taking into account all of these factors, corn futures prices have risen from $4.94 per bushel in September 2021 to $7.75 today.
There is also some concern that more ethanol production will reduce the food supply because 44% of the corn grown in the U.S. is already used to produce alcohol. But only about 10% of the corn grown in the U.S. is directly used to produce food for people, mostly in the forms of corn oil and high-fructose corn syrup. Approximately 45% of the corn grown in the U.S. is used for animal feed, so higher corn prices will increase the costs of raising livestock and the prices of meat in the grocery store.
The fermentation process used to produce alcohol uses the starch in the corn, leaving "spent grain" that is high in protein and minerals. This byproduct is used as a supplement in animal feed, so the production of ethanol is not a total loss of animal feed.
The Ukraine/Russia War also impacts the price and availability of food crops. Russia is the world's leading exporter of wheat, and Ukraine is the fifth largest wheat exporter. While neither country exports much corn, Ukraine produces 25% of the sunflower seeds grown worldwide, and Russia produces another 22%. Sunflower seeds are mostly used to produce cooking oil, but corn oil can be substituted for sunflower oil. The result of the war will be increased demand for corn, higher corn prices, and higher overall food prices worldwide.
The sale of E15 fuel during the summer will have a minimal effect on fuel prices. This move was designed to show that the administration is at least doing something to reduce fuel prices at the pump.