Ethanol Demand in United States Production of Oxygenate-limited Gasoline

Abstract

Ethanol competes with methyl tertiary butyl ether (MTBE) to satisfy oxygen, octane, and volume requirements of certain gasolines. However, MTBE has water quality problems that may create significant market opportunities for ethanol. Oak Ridge National Laboratory (ORNL) has used its Refinery Yield Model to estimate ethanol demand in gasolines with restricted use of MTBE. Reduction of the use of MTBE would increase the costs of gasoline production and possibly reduce the gasoline output of U.S. refineries. The potential gasoline supply problems of an MTBE ban could be mitigated by allowing a modest 3 vol percent MTBE in all gasoline. In the U.S. East and Gulf Coast gasoline producing regions, the 3 vol percent MTBE option results in costs that are 40 percent less than an MTBE ban. In the U.S. Midwest gasoline producing region, with already high use of ethanol, an MTBE ban has minimal effect on ethanol demand unless gasoline producers in other regions bid away the local supply of ethanol. The ethanol/MTBE issue gained momentum in March 2000 when the Clinton Administration announced that it would ask Congress to amend the Clean Air Act to provide the authority to significantly reduce or eliminate the use of MTBE; to ensure that air quality gains are not diminished as MTBE use is reduced; and to replace the existing oxygenate requirement in the Clean Air Act with a renewable fuel standard for all gasoline. Premises for the ORNL study are consistent with the Administration announcement, and the ethanol demand curve estimates of this study can be used to evaluate the impact of the Administration principles and related policy initiatives.