If you are already familiar with ethanol as a commodity, you can head straight to our ethanol trading guide with a list of regulated brokers.
Main Uses Of Ethanol
Ethanol is almost exclusively blended with gasoline and used as a fuel. There are no other significant commercial uses for the product.
In the United States, most ethanol is refined into two types of fuel:
|E10 and E15||The amount of ethanol blended into gasoline varies by region in the United States, but generally doesn’t exceed 10%. Gasoline with 10% ethanol content is referred to as E10, while gasoline with 15% content is referred to as E15. All vehicles can use E10, while only light-weight vehicles produced after 2001 can use E15.|
|E85||E85 is a blend of gasoline that contains between 51 and 83% ethanol. E85 is referred to as an alternative fuel and is mostly sold in the Midwestern region of the United States.|
Why is Ethanol Valuable?
Ethanol is a clear, colorless alcohol produced mostly from grains or sugar. Since it is made from biomass (*organic material derived from plants and animals), it is considered a renewable energy.
Ethanol is often blended with gasoline or diesel fuels to produce a cleaner-burning fuel for automobiles.
The history of ethanol as a fuel source dates back almost 200 years. In 1826, inventor Samuel Morey first used ethanol to power an engine, and in the 1850s, ethanol competed with kerosene as a lighting fuel.
However, liquor taxes enacted during the US Civil War made ethanol no longer economically viable as a fuel.
Prohibition And Taxing
In 1906, the repeal of the liquor tax briefly revived interest in ethanol. In 1908, Henry Ford engineered the Model T, an early automobile, to run on a blend of gasoline and alcohol.
However, the passage of Prohibition in 1919 banned the sale of alcohol and effectively ended the ethanol market.
The ending of Prohibition in 1933 produced renewed interest in ethanol. The scarcity of oil during World War II caused a temporary rise in demand.
However, the evolution of ethanol into a significant global commodity really didn’t begin until the 1970s.
Rising oil prices, embargoes, and increasing dependence on foreign oil revived interest in ethanol in the United States. Since then, tax incentives and environmental regulations have steered oil companies toward creating cleaner-burning fuels.
Restrictions On Ethanol Use
In 2005, the US Congress passed Renewable Fuel Standard (RFS). This law mandated fuel producers to use a minimum amount of renewable fuels including ethanol.
In 2007, The Energy Independence and Security Act (EISA) raised the target of renewable fuel usage to 36 billion gallons by 2022. In 2016, fuel producers added about 14 billion gallons of ethanol to gasoline in the United States.
Today global ethanol production tops 25 billion gallons. However, the commodity is the subject of considerable controversy.
While proponents say it produces cleaner fuel and reduces dependence on fossil fuels, critics argue that ethanol produces its own pollution problems and does little more than subsidize the corn industry in the United States and the sugar industry in Brazil.
How Is Ethanol Produced?
Ethanol production begins with choosing a feedstock to make the fuel.
Typically producers use the sugars in grains such as corn, sorghum and barley in the distillation process. However, other plants can also be used:
Production of these feedstocks into ethanol takes place mostly through fermentation:
The most common method of ethanol production uses yeast to convert the feedstocks into sugar. This process of chemically breaking down a substance into sugars is known as fermentation.
In the United States, the low price and abundance of corn makes it the most common feedstock used in the fermentation process. Wheat and sorghum are used to a lesser extent.
Grinding The Grains
In other parts of the world, sugar cane and sugar beets serve as common feedstocks for ethanol production.
In Brazil, which is the second-largest ethanol producer after the United States, most production takes place with sugar cane.
Most modern ethanol plants are “dry grind” plants. In these facilities, machines pulverize corn kernels into fine particles. Water and enzymes are then added to the ground corn to begin breaking down the starch.
The mixture, which is called mash, then gets cooked in ovens and cooled down. At this point, a second enzyme, glucoamylase, gets added to the mash to help convert it into sugars.
Finally, yeast is added, and the resulting fermentation creates ethanol and carbon dioxide.
Liquidization And Blending
After two days of fermentation, ovens heat the mash again. This heating releases ethanol in the form of a vapor, while the corn and yeast remain in a solid form.
The ethanol vapor is collected, cooled, and condensed into a liquid. Dehydration removes water from liquid ethanol and produces anhydrous ethanol. This substance can now be blended with gasoline.
A much less common form of ethanol production involves breaking down cellulose in plant fibers. This process, known as cellulosic ethanol, is more complex than fermentation.
In cellulosic ethanol trees, grasses and agricultural residues serve as feedstocks. These crops can grow on land not suitable for grain production and require less fertilizer, energy and water than grains do.
New strains of fast-growing trees can reach maturity in less than 10 years. As a result, cellulosic ethanol holds much promise for the future. However, current commercial production of cellulosic ethanol is very small.
Transportation To Blending Facilities
After ethanol plants produce the fuel, trucks and railcars transport it to blending facilities where it is mixed with gasoline to form E-10 or E-85 blends used in consumer engines.
Unlike petroleum and natural gas, ethanol does not currently use pipelines for transportation. As a result, transportation costs impact the price of the product.
Although the physical and chemical properties of biofuels make pipeline transportation more challenging, the industry is looking for ways to overcome these obstacles.
Top Ethanol Producing Countries
|Rank||Flag||Country||Ethanol Produced (Millions of Gallons)|
|#1||United States of America||15,329|
Why is Ethanol Blended?
Ethanol can be used on its own as a fuel, but it typically is blended with gasoline or diesel fuels. In the United States, gasoline contains about 10% ethanol by volume.
There are both economic and scientific reasons for blending.
First, ethanol generally costs more to produce than gasoline. Although grain prices play a role in determining cost, alcohol production is also a significant cost.
The distillation of grains is more complicated and costly than the distillation of crude oil.
Energy Efficiency And Corrosion
Secondly, ethanol carries less energy than an equivalent amount of gasoline. As a result, it produces lower fuel efficiency than gasoline.
Finally, current automobile designs make ethanol more corrosive to engines. One reason for this is that ethanol absorbs more water from the air than gasoline, and this may contribute to the contamination of fuel systems.
What Drives the Price of Ethanol?
The price of ethanol is driven mostly by these five factors:
- Crude Oil and Gasoline Prices
- Production Costs
- Ethanol Stocks
- Ethanol Mandates
- Transportation Logistics
Crude Oil and Gasoline Prices
Crude oil and gasoline prices show a high correlation with the price of ethanol.
The reason for these strong positive relationships is that ethanol is a substitute commodity.
If crude and gasoline prices rise significantly, then consumers are more likely to embrace alternative fuels such as E85. This should drive ethanol prices higher.
On the other hand, a significant drop in the price of gasoline could magnify the cost differences between ethanol and gasoline and push ethanol prices lower.
The current production of ethanol in the United States mostly involves corn, and conventional wisdom is that ethanol demand drives the price of corn.
However, corn is also a food source, and it trades independently. In the recent past, there have been ample and cheap supplies of corn, but disruptions in this supply could lead to higher ethanol prices.
Similarly, improvements in the use of trees, grasses and agricultural residues as feedstocks could significantly lower the cost of producing ethanol and drive prices for the commodity lower.
The US Energy Information Administration (EIA) releases a weekly report that shows changes in ethanol inventories.
These inventory levels show a remarkably high correlation with ethanol prices.
When ethanol producers cut back on production, gasoline manufacturers draw down on these stocks. This creates tight supplies and leads to higher prices.
On the other hand, increases in production levels can lead to a build-up of inventories and lower prices.
Ethanol mandates in the United States make ethanol a heavily subsidized commodity. The impetus for these subsidies is the belief that ethanol is more environmentally friendly and makes the United States less dependent on foreign oil.
However, events of the last few years have called this reasoning into question. Fertilizer and pesticide runoffs from the US Corn Belt are contributing to pollution in the Atlantic Ocean and Gulf of Mexico.
Ethanol processing plants in the Midwest are also contributors to pollution. At the same time, the United States has developed a vibrant shale oil industry that makes the nation energy independent.
If the US were to revise or scrap ethanol mandates, then it would have a devastating effect on ethanol prices.
Ethanol is prone to evaporation and corrodes easily. These properties make transporting it by pipelines impractical.
As a result, ethanol deliveries take place on trucks, barges, and railcars, therefore, the price is very sensitive to transportation logistics.
Factors such as severe winter weather can delay trucks and cause shortfalls in supply. Similarly, rail traffic congestion can create supply bottlenecks.
What Do the Experts Think About Ethanol?
One analyst believes the planned rollout of mandates in China is a major positive catalyst for ethanol. He argues that this news could spur a wave of foreign trade in the ethanol sector in China:
More money will now flow in, including from private and foreign traders.
– Li Qiang, chairman of consultancy JC Intelligence Ltd
A leading supplier in the United States believes relaxed fuel standards by the US government should help support the domestic ethanol market:
The E-15 waiver got people excited for (higher) blends. Blenders will be able to use more ethanol per gallon of gasoline, boosting demand temporarily despite the gas shortage.
– Jordan Fife, BioUrja Trading LLC
If you want to learn more about ethanol, see our guide on how and where you can trade it.
Our team of experts have also created other energy commodity trading guides, like: