• In 1999 (the last complete year of data available) total U.S. gasoline consumption was about 131 billion gallons. Since gasoline demand tends to grow at about 1% per year, 1999 data provides a good picture of the current market.
• Of the 131 billion gallons about 84 billion, or 64% was classified as conventional gasoline. That means it was not required to contain an oxygenate for any reason, but may contain ethanol or MTBE to boost octane.
• About 5 billion gallons, or less than 4%, of the 131 billion gallon total is classified as oxygenated gasoline. This gasoline is used during the wintertime in carbon monoxide nonattainment areas.
• Reformulated gasoline (RFG) is required in areas that have severe ozone pollution. In addition to emissions performance standards, RFG must contain 2.0% oxygen by weight. About 42 billion gallons of RFG are produced annually, or 32% of total gasoline.

How much ethanol is produced and where is it sold in gasoline?

• In calendar year 2000, ethanol production set a new record. U.S. ethanol production exceeded 1.6 billion gallons. Many industry insiders believe the industry is capable of producing 2 billion gallons in 2001 if the demand exists.
• Oxygenated gasoline must contain a minimum of 2.7% oxygen by weight. We estimate that the oxygenated fuels program uses about 300 million gallons of ethanol annually.
• RFG must contain an average of 2.0% oxygen by weight. We estimate that 4-6 billion gallons of the RFG sold annually contains approximately 400 million gallons of ethanol.
• The remaining 900 million gallons of ethanol produced in 2000 were sold in conventional gasoline.
  

What would ethanol's demand be if MTBE were eliminated?

• If the entire 42 billion gallons of RFG were to use ethanol to supply the oxygen requirement, approximately 2.4 billion gallons of ethanol would be needed.
• In 2000 about 3.25 billion gallons of MTBE were produced. Total supply of MTBE in 2000 (including stocks) was reported at 3.67 billion gallons. Most of this MTBE was blended into RFG.
• If ethanol replaced all of the MTBE currently being sold and all conventional gasoline markets for ethanol were maintained, the annual demand for ethanol would be 3.6 billion gallons. That is about double the amount most industry insiders believe is the current capacity of the ethanol industry. We estimate a doubling of the industry could add $0.25 to $0.35 per bushel to the price of corn.
• If ethanol just moves into the California market within the next few years, it will use about 225 million bushels of corn and raise prices $0.9 to $0.14 per bushel.

How could ethanol producers increase production to meet this demand and how long would that take?

• In the past 15 years, the ethanol industry has built about 50 plants. There are currently 58 plants operating now. There are almost 100 new ethanol projects being discussed all over the U.S.
• Last November, the USDA announced a new bioenergy program that is aimed at increasing the industrial consumption of agricultural commodities by promoting their use in the production of biofuels like ethanol and biodiesel.
• Under the program, the Commodity Credit Corporation will make payments to ethanol and other bioenergy producers who increase their existing production.
• The program has a $150 Million budget for FY 2001 and FY 2002 for a total of $300 million in available payments. However, money that is not obligated in a fiscal year cannot be carried forward into the next year. The first sign-up has been announced and the approved agreements, if met in full would add 246.2 million gallons of additional ethanol production in 2000.
• Ethanol producers can increase existing production by investing in new equipment that make plants more efficient, or by building new plants. Both of these activities are expected to push production higher in 2001.
  How can ethanol use affect energy security?
• Energy security is a major national security issue. We are importing almost 60% of our oil and that number is growing. Building a strong and diverse ethanol industry could eventually displace billions of gallons of gasoline each year.
• Displacing foreign oil imports with domestically produced renewable fuels not only displaces imports, but saves the cost of those imports which are controlled by the oil cartel OPEC.

What is the Renewable Fuels Requirement and how would it impact ethanol demand?

• Renewable fuels are fuels made from materials that can be continuously produced. They take carbon from the atmosphere and energy from the sun to produce biomass that is then converted into liquid energy like ethanol. We are now capable of making 135 units of energy in the form of ethanol for every 100 units of energy we use to produce the ethanol. A renewable requirement would require fuel producers to certify that a specified percentage of their fuel contains renewable fuel.
• There have been several proposals for renewable fuels requirements. In the last Congress, S.2962 passed the Senate Environment and Public Works Committee and could have tripled the ethanol market by 2010 if no states chose to opt-out of the program. Other bills like those proposed by Sens. Daschle and Lugar, and Sen. Harkin also contained renewable requirements that at least tripled the market by 2010.
• Unlike the oxygen requirement that is part of the RFG program, the renewable requirement would not be linked to specific gasoline markets. Ethanol blended into conventional in Iowa or Nebraska would be counted the same as ethanol blended in RFG in Chicago or New York. This means that the concept of averaging is also important in the implementation of a renewable requirement as it is for providing additional flexibility in the RFG program using oxygen averaging.
• The impact of the oxygen requirement and the renewable fuels requirement depend on the timeframe in which they are analyzed. If MTBE is largely phased-out of gasoline by 2005, the demand for ethanol will about double. The current consensus or goal on a renewable requirement is that it should triple the size of the industry by 2010.

What factors have the biggest effect on ethanol prices?

• Ethanol is sold into the gasoline blending market where it competes with other oxygenates and octane components and with gasoline itself. Therefore, ethanol's price is significantly affected by its value to refiners in these markets.
• Ethanol prices are highly correlated with the price of gasoline and gasoline blending components. The price of corn has very little to do with the price of ethanol. That is why low corn prices do not always indicate low ethanol prices and high corn prices do not always indicate high ethanol prices.
• Ethanol prices are determined by the supply and demand for ethanol in specific markets. For example, during the past six months, ethanol prices have been increasing because demand is increasing as MTBE is coming out of gasoline and the underlying gasoline market is also tight.
• The price of ethanol-blended gasoline at the pump is also partly determined by the characteristics of specific blends such as the octane number or the addition of other proprietary additive packages that retailers may use.
• Prices also vary in time and place. Ethanol blends in winter gasoline can have a significantly different price than summer blends in the same markets. Moreover, ethanol-blending economics in Columbus, OH may be significantly different from those in Omaha, NE while ethanol prices in the two cities may be quite similar. This could result in significantly differences in the cost of ethanol-blended gasoline in these locations even though ethanol prices are similar.

What is isooctane and how will it compete with ethanol?

• Isooctane is a chemical made from petroleum and natural gas products, especially butanes. Isooctane is a clean source of octane for gasoline that can compete with ethanol and other octane-enhancers.
• ·Isooctane can be produced in refineries or MTBE plants that have been modified. Pure isooctane contains no aromatics or olefins and exhibits a road octane number of 100 and an RVP of 2 psi. It is a major component of refinery alkylate. Isooctane and alkylate do not contain oxygen.
• MTBE producers will need to invest $58 million to convert their production to isooctane. However, because of the different chemistry, the same plants will only get about 2/3 of the production they got as MTBE plants.
• However, operating costs of the facilities will increase and the octane value of the isooctane product will be about 10 points less than that of MTBE. Therefore, isooctane will probably be part of gasoline blending in the future, but ethanol will be competitive in gasoline blending markets.

What are the key strategic issues associated with passing a renewable fuels requirement and maintaining the RFG oxygen requirement?

• The Bush Administration and the Congress have indicated their intention to craft a comprehensive energy bill and pass it in the 107th Congress. This bill could include a renewable fuels requirement.
• The RFG program with an oxygenate requirement is part of the Clean Air Act. Therefore it is possible to pass an energy bill with a renewable fuels requirement while maintaining the RFG program with an oxygen requirement.
• Several industry experts believe the real issue of the RFG program will come when the CAA is reauthorized. This could happen as soon as 2005 or 2006. Some believe that the new clean burning gasoline that will be required everywhere in the U.S. in combination with new clean vehicles will make RFG obsolete. That is why we want to establish a renewable standard now while keeping the RFG oxygen requirement so that we can establish strong markets for ethanol and gain consumer acceptance of ethanol across the country.
• Much of the water contamination caused by MTBE is because of leaking underground storage tanks. Several Members of Congress want to address this problem in a new bill in the Senate Environment and Public Works Committee and the House Energy and Commerce Committee.

ST. LOUIS OFFICE

WASHINGTON D.C. OFFICE