Ethanol, Ozone Interests on Collision Course

There is a potential logjam looming on the horizon in the fuel markets as ethanol mandates grow, said Bob Tippee, editor of the Oil and Gas Journal.
Tippee delivered his annual midyear market report to about 50 Energy Advocates and guests at the Petroleum Club July 10.
The 2006 Energy Bill mandates greater and greater quantities of ethanol be produced and injected into the nation’s gasoline stream. At the same time, the U.S. Environmental Protection Agency in March ratcheted down the 8-hour ozone standard across the U.S., making them tougher.
Depending on air conditions, ethanol aggravates the ozone, or smog, levels, Tippee said.
“It causes more nitrous oxide emissions out the tailpipe and evaporative emission off carburetors,” Tippee said. Those emissions combine with sunlight to create ground-level smog.
Higher ozone levels in cities like Tulsa could push the metro area into non-attainment status, which would force drivers to use reformulated gasoline and drive fuel prices even higher.
Add to the mix that ethanol only delivers about 75 percent of the same power as a gallon of gasoline — which means motorists must re-fuel more often.
Recall that ethanol mandates are rising, but gasoline consumption is dropping with $4-per-gallon pump prices.
It means that ethanol, which originally was targeted for reformulated gasoline types, will have to move into conventional gasoline, Tippee said.
“How is the government going to meet those big mandate numbers?”
Ethanol does not get the job done, Tippee said.
“Congress must come to its senses and either put a halt on ethanol mandates or lessen the numbers. We have to do something about this ethanol mandate,” he said.
Congress will not admit it made a mistake.
“But it did,” Tippee said. “We have to deal with it. We can certainly ease the mandate.”
Focusing on the broader market, Tippee said oil demand remains slightly below supply, which is about 86 million barrels per day. There is only a 1.95-million-barrels difference each day between supply and demand.
Asian nations have started removing gasoline subsidies, causing a shock at the pump as prices go from 80 cents a gallon toward $4 a gallon. That affects demand in China, Malaysia and Indonesia.
Help might be on the way. But, not from the U.S.
Saudi Arabia is about to come online with the Khurais Oil Field. The massive field, scheduled to begin production next year, is expected to add 1.2 million barrels of crude oil daily to world supplies.
Tippee said it could be a key to what drivers pay at the pump for years to come.
Saudi Arabia has called the project the single largest expansion of oil production capacity in history. The patch of sand 100 miles west of the Saudi capital of Riyadh has become one of the most important places in the world economy as Saudi Arabia spends $10 billion to build the infrastructure in order to begin pumping by next June.
“Traders will then have a reason to be less jittery about geopolitical problems,” Tippee said.
In refining, capacity is up but utilization is down because of mandates for ultra-low sulfur diesel. To remove sulfur from crude oil is a complex chemical process that takes time and capacity. That creates a bottleneck and further strains supplies.
Any hiccup in refining accelerates pump prices, which in turn cripples the economy.
“The question is, how sick is the U.S. economy?” Tippee said. “I do not see the bottom.”
The numbers say that technically we are not in a recession, yet there is plenty of anecdotal evidence suggesting consumers are tightening their belts.

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