A Changing Tide

Ethanol's influence grows in global trade
By Kris Bevill | December 27, 2010
The U.S. ethanol industry was created in part to displace the need for imported oil. But how is domestic ethanol use impacting the global gasoline market? A report issued by research and consulting firm Energy Security Analysis Inc. offers a surprising look at the impact U.S. ethanol is having on transportation fuels markets worldwide. ESAI's clients consist mainly of international oil companies and refiners. The report was written from a conventional fuels perspective and focused on transportation fuels markets in the Atlantic Basin, which includes North America, Latin America and Europe, and evaluated how alternative fuels are being integrated with traditional fuels. While the markets included in the study are already some of the largest biofuels markets in the world, ESAI researchers found that the continued growth of biofuels demand, specifically ethanol in North and Latin America and biodiesel in Europe, will squeeze out a significant portion of gasoline demand over the next two years. In the U.S., increased demand for ethanol as a result of growing renewable fuel standard requirements will cut the need for gasoline imports by more than half of 2008 levels within the next two years. The result is an emerging transportation fuel market that includes ethanol as a primary component, says Sander Cohan, ESAI principal and lead alternative fuels researcher for the firm. "This is a tipping point," he says. "The volume of ethanol blending in the United States has moved from something that is a relatively small amount to something that is a substantial and very real part of mainstream fuels. This is a change to the business model that should be addressed sooner rather than later." Because of ethanol's growing role in the U.S. market, exporters of gasoline to the U.S. will find themselves with a stockpile of petroleum, Cohan says. Traditionally, the U.S. has consumed about 1 million barrels of gasoline imports per day. In the past, much of that demand has been supplied by Europe, which traditionally has a substantial surplus of gasoline. Europe ships gasoline to the U.S. and the U.S. backhauls diesel to Europe. Cohan says this arrangement has been convenient for both markets, but that is about to change. "As the United States exports diesel, it has less of an appetite for gasoline," he says. "What that means is that European gasoline has to go elsewhere. They have to start looking for new markets." As a result, European gas suppliers are expected to target replacement markets in areas of the Middle East and Africa. Another new issue brought about by increased ethanol consumption in the U.S. is the demand cycle for RBOB (reformulated blendstock for oxygenate blending). Foreign producers look to the U.S. East Coast as an RBOB demand center, which is changing from a steady year-round market to a seasonal market. "You'll see foreign exports really peak in the May-June-July period," Cohan says. "For exporters to the U.S., they're starting to see a shift in trade patterns and that requires a change of strategy." Because ethanol will consume a larger share of the gasoline market in the next two years, ESAI expects the U.S. to shift its focus towards ethanol blending. The firm predicts in its report that ethanol blending demand will rise from just over 775,000 barrels per day in 2010 to 850,000 barrels per day in 2012. How will this affect oil and refining operations? Cohan expects they will assume larger roles as producers and blenders of biofuels over the coming years. "Oil companies and refiners are very savvy firms," he says. "They're starting to address this very seriously and this is a definitive example of the tide changing."