ethanol & petroleum: substitute goods or complementary goods joel schumacher associate...
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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?
1. They are substitute goods
2. 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
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• 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
What is ethanol?
A Substitute 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%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Ethanol as a % of Gasoline Consumption
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
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
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
PriceSupply**
Supply
P**
P*
Demand
00 Q* Q**
Quantity
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
YearRenewable
BiofuelAdvanced
BiofuelCellulosic
BiofuelBiomass Based
DieselUndifferentiated Advanced Biofuel
2008 9.00 0.00 0.00 0.00 0.002009 10.50 0.60 0.00 0.50 0.102010 12.00 0.95 0.10 0.65 0.202011 12.60 1.35 0.25 0.80 0.302012 13.20 2.00 0.50 1.00 0.502013 13.80 2.75 1.00 0.00 1.75
2022 15 21 16.00 0.00 5.00
Advanced Biofuels DetailsRenewable Fuels Standard
Why is this important?
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Ethanol as a % of Gasoline Consumption
2012 Ethanol Blend Level
9.9% of Gasoline Consumption
Why Don’t Americans Purchase E85?
Availability?? Car Compatibility?? Price??
2012 2011 2010 2009 2008 20070%
5%
10%
15%
20%
25%
30%
35%
40%
Price Premium E85 vs. Gasoline (Per BTU)
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
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?
1. They are substitute goods
2. They are complementary goods
3. Not sure
Questions
Joel Schumacher
406-994-6637
www.ampc.montana.edu