From Hydrocarbons to Carbohydrates? Ethanol and the Oil Market

Ethanol's rise from a niche business to a rapidly growing industry is being driven by a confluence of drivers-some new, some old. This Private Report examines these drivers, including high petroleum prices, the phaseout of methyl tertiary butyl ether (MTBE) from the US gasoline pool, and ethanol's broad political support. It also explores challenges facing the industry, including those concerning the production of ethanol from cellulosic biomass instead of traditional grain or sugar crops.

* With the US gasoline market now fully shifted from MTBE to ethanol, incremental demand for ethanol will come from increased discretionary blending of ethanol and new state mandates. As new ethanol capacity brings supply well above government-mandated levels, ethanol prices will likely erode relative to those for gasoline, encouraging more aggressive discretionary blending of ethanol.
* Ethanol derived from grain is unlikely to supply more than 10 percent by volume of the US gasoline pool due to limits on the amount of cropland that can be shifted from food end uses to fuel. Cellulosic ethanol will be necessary to displace more than this volume.
* There are three key techno-economic challenges to commercializing a cellulosic ethanol industry. Enzymes that break down biomass into sugars must become more efficient, biomass feedstock must be obtained economically and sustainably, and capital costs to build cellulosic refineries need to decline.
* Even the largest cellulosic ethanol refineries of the future will be just a fraction of the size of typical petroleum refineries. Wide-scale ethanol use therefore implies a more distributed, locally produced fuel supply network compared to today's centralized market. If E85 (85 percent ethanol, 15 percent gasoline) becomes a serious market in the United States, it will almost certainly happen on a regional scale first instead of nationally.

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