Ethanol & Petroleum: Substitute Goods or Complementary Goods Joel Schumacher Associate Specialist Dept. of Ag. Economics & Economics

What is a substitute product?

What makes a good substitute?

Economic Principle: Substitution Consumers substitute one product for another based on product attributes. Price Quality Availability

What is a complementary product?

Definition of complement A good or service the is used in conjunction with another good or service. Examples: Trucks and Truck Tires Automobile and Automobile Insurance

Which best describes the relationship between Ethanol & Gasoline? They are substitute goods They are complementary goods

What is gasoline used for? Transportation Cars, Pickups, Vans, Motorcycles Recreational Equipment Small Boat Engines, Four-Wheelers, Snowmobiles Other Stuff Small Engines (lawnmowers, snow blowers, etc.) Generators Older Farm Equipment

2011 US Energy Supply & Demand EIA Data

How is Gasoline Manufactured?

Gasoline Additives: Oxygenates 1970s & 1980s: Two Types of Gasoline Leaded & Unleaded 1990s: One Type of Gasoline Reformulated Gasoline (Modified Unleaded) MTBE was the primary additive 2000s: Two Types of Gasoline MTBE & Ethanol About 25 States have banned MTBE

How do we use ethanol? Ethanol is blended with Gasoline: 1% to 10% Ethanol & Gasoline Blend (E10) 15% Ethanol & Gasoline Blend (E15) 85% Ethanol & Gasoline Blend (E85)

Ethanol Markets 10% or less ethanol blends 15% Blend (E15) Responsible for 98%-99% of all ethanol sales 15% Blend (E15) New to the market 85% Blend (E85) Requires flex fuel vehicle Few retail locations 1.6% of stations offer E85 Consumer Choice http://www.dtnprogressivefarmer.com/dtnag/common/link.do;jsessionid=B698DC6DD94416FE753C63F96B96F0F9.agfreejvm1?symbolicName=/free/news/template1&product=DTN/Ag/Markets/RenewableFuels&vendorReference=9e3c08b5-bfb7-40a9-9d30-ac4d7ef78053__1369059064320&paneContentId=3031&paneParentId=0

What is ethanol? A Substitute Product A Complement Product Ethanol is a substitute at blends of over 5-7% Ethanol is a substitute for MTBE and Lead A Complement Product Ethanol is complement at blends over 5-7%

Substitutes for Gasoline

Substitutes for Gasoline Propane Natural Gas Ethanol Several Products: E10, E15 & E85 Diesel or Biodiesel Electric Battery (fork lifts, plug-in cars, golf carts) Wired (Subway Trains)

Transportation Fuels Cars, Light Trucks Gas, Diesel, Biofuels, Propane, Natural Gas, Electric Medium & Long Haul Trucks Diesel, Biodiesel, Natural Gas Train Diesel, Electric Plane Petroleum Based Jet-Fuel Ship Diesel or Bunker Fuels

Data Source: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

Data Source: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

Barriers to Substitution Common barriers: Availability Utility companies E85 fuel Price Capital Investments Selling your gasoline car and buying an electric car Selling your non-flex fuel vehicle and buying a flex fuel vehicle

Data Source: http://www.neo.ne.gov/statshtml/66.html

Short Term vs. Long Term Options Drive less Short & Long Term  Lower Utility Reduce Shipping Short & Long Term  Lower Utility, Higher Costs Improve fuel efficiency Long Term  Capital Investment Required Increase use of alternatives Biofuels: Short & Long Term  ????? Electric: Long Term  Capital Investments & Technology Natural Gas: Mid-Term  Capital Investments

Substitution & Elasticity Demand for transportation fuels is relatively inelastic

Do State or Federal Governments play a role in Ethanol?

Government Involvement Environmental Issues Oxygenate Requirements (Clean Air Act-EPA) Missoula MTBE Bans State Level Montana has a ban (Sort of) About ½ of states ban MTBE

Renewable Fuels Standard

Data Source: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MFEIMUS1&f=A And EIA’s Monthly Energy Review

Data Source: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

Why is this important?

2012 Ethanol Blend Level 9.9% of Gasoline Consumption

Why Don’t Americans Purchase E85? Availability?? Car Compatibility?? Price??

Expanding Ethanol Use E15 Blends EPA approved E15 for 2007 and newer vehicles October 13, 2010 EPA approved E15 for 2001-2006 vehicles January 21, 2011

E15 Issues Retail Infrastructure Gas Stations currently 3 to 6 products Low Octane Gasoline (85.5 to 87) Mid Grade Gasoline (88-89) Premium Gasoline (91)

Montana’s Role in Ethanol No commercial ethanol production in Montana No small scale fuel ethanol production technology 2012 Montana corn production was 4.5M bushels If all of it was used for ethanol… MT could produce 13.3 million gallons of ethanol This is about 2.7% of Montana gasoline use http://www.eia.gov/state/state-energy-profiles-data.cfm?sid=MT#Consumption http://www.nass.usda.gov/Statistics_by_State/Montana/index.asp 2012: http://usda01.library.cornell.edu/usda/nass/CropProdSu//2010s/2012/CropProdSu-01-12-2012.pdf

What is the future of ethanol? Will E15 replace with E10 or will it be an additional option? What happens if the Renewable Fuels Standard is reduced or eliminated? What if gasoline consumption falls? Better fuel economy Natural Gas Vehicles Electric Vehicles

Which best describes the relationship between Ethanol & Gasoline? They are substitute goods They are complementary goods Not sure

Questions Joel Schumacher jschumacher@montana.edu 406-994-6637 www.ampc.montana.edu