Typical ways of looking at the value of ethanol as a gasoline blendstock in the US miss the value that the biofuel's higher octane brings, according to an article from two agriculture professors this week.
"This is a simple, straightforward analysis meant to provoke discussion," Scott Irwin, professor at University of Illinois at Urbana-Champaign, said in a Thursday phone call with S&P Global Platts.
Irwin and Darrel Good, the other author, said that many analyses look at the flat price of ethanol and CBOB gasoline but ignore ethanol's octane value.
On a flat price basis, ethanol is usually cheaper than gasoline. But ethanol has a lower energy density -- about 66% that of CBOB.
With that in mind, ethanol's value is higher than CBOB the majority of the time.
But the authors compared ethanol with other common blendstocks used to boost gasoline's octane value, specifically toluene, xylene and benzene.
Ethanol typically maintains a discount to aromatics, giving it a price advantage. The authors call ethanol's discount to aromatics its octane premium, which the they see outweighing its lower energy content.
Platts assessed Houston ethanol, the region the authors considered, at $1.5675/gal on Thursday. Platts assessed toluene on the Gulf Coast at $2.29/gal and xylene at $2.15/gal the same day, with Gulf Coast CBOB at $1.4592/gal.
Aromatics also have lower energy densities than CBOB, but not as low as ethanol.
The authors did not take into account the Renewable Identification Numbers that come with ethanol, which some people consider when valuing the biofuel.
"RINs themselves have very little to any effect on price in the supply chain," Irwin said during Thursday's call.
Irwin said a refiner might have to buy a RIN to demonstrate compliance with the Renewable Fuel Standard, but the refiner would then raise the price of its products by the cost of the RIN. The blender who separates the RIN and sells it back to the refiner would then discount the product at the pump.
PIRA Energy Group, a unit of Platts, said the article provides a way of valuing the economics of ethanol, even if the current market doesn't need to follow that approach.
"There used to be a federal tax credit for ethanol blending that expired in 2011," Dave Zinamon, managing director of refining and NGLs at PIRA, said. "Now there's a simple mandate."
That means refiners and blenders don't have much flexibility when it comes to ethanol. The Renewable Fuel Standard requires that obligated parties include the biofuel in the transportation fuel pool. In 2017, obligated parties are required to blend around 15 billion gallons of ethanol.
But the current RFS expires in 2022, which could open blending economics for refiners' consideration. And ethanol has several properties that refiners have to evaluate when making blending decisions, including those the authors listed.
"Ethanol has very favorable physical properties, which would provide good blending opportunities," Zinamon said. "But ethanol has a higher vapor pressure, which can penalize its use, especially in the summer. There are a lot of calculations."
But market sources saw only marginal value in the piece, which was published Wednesday in a blog post on the university's website.
"Most white papers are written with blinders on," one source said. "If you accounted for all variables, the white paper would go from a few pages in length to thousands."
