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Corn+Soybean Digest

Ethanol, MTBE and environmental issues spark a...Great Fuel Debate

In the battle over Phase II of the federal Reformulated Gasoline Program, which went into effect June 1, the nation's corn growers may be big winners.

The Environmental Protection Agency (EPA) has proposed a ban on MTBE (methyl tertiary butyl ether) as a gasoline oxygenate, and ethanol is a logical replacement for that petroleum-based additive. Replacing MTBE with ethanol would have a dramatic impact on the corn market. It would:

* Eat up 1.3 billion bushels per year by 2004, up from the 600 million bushels currently used to make ethanol.

* Add up to $4 billion to the value of the U.S. corn crop.

The gasoline oxygenate market is huge. If ethanol replaced MTBE just in California, for example, "it would create a minimum new market opportunity of approximately 550 million gallons of ethanol in that state every year," says Eric Vaughn, president of the Renewable Fuels Association.

The proposed ban results from findings that, while MTBE has reduced emissions, 5-10% of drinking water supplies in areas using reformulated gasoline (RFG) contain detectable levels of MTBE. Carol Browner, EPA administrator, says the ban, which the agency expects to phase in over a three-year period, will have little effect on gasoline prices.

"The time has come to take action," says Browner. "Americans deserve both clean air and clean water, and never one at the expense of the other."

However, because of water-quality concerns created by MTBE, the most widely used oxygenate, EPA has also petitioned Congress to eliminate a portion of the 1990 Clean Air Act. The request would ease the requirement that gasoline in areas with serious air pollution consist of at least 2% oxygen by weight. Obvious air-quality issues surround the motion.

Instead of relaxing the Clean Air Act, the Senate's Bond-Durbin bill, introduced in May, calls for the use of ethanol and other environmentally friendly alternative fuels in place of MTBE. A similar House bill, H.R. 4011, was introduced in March and has bipartisan support.

Thus, the door opens for ethanol - or so it would seem. A National Governors' Association report calls ethanol the "most practical national substitute" for MTBE.

"Ethanol's positive impact on air quality and fuel performance, and minimal water quality risks and health effects make it the most viable replacement fuel additive," the report reads.

But critics fear that ethanol makers won't be able to meet demand and the MTBE ban will lead to additive shortages and higher gasoline prices.

"We have enough ethanol today to meet the entire oxygenate requirement in the United States today," Vaughn responds. "We could replace all the MTBE in America right now, this minute, with what we sell right now, this minute, in ethanol. We could. But we've made a commitment, as an industry ... we're not going to leave a single ethanol customer without ethanol as we grow and transition to these RFG-program areas."

Currently, about 1.5 billion gallons of ethanol are produced domestically each year while virtually all MTBE is imported. Ethanol accounts for roughly 8% of the RFG market compared to MTBE's 85%.

A study commissioned by the Governors' Ethanol Coalition found that U.S. ethanol production could be increased to 3.5 billion gallons per year by 2004. That would be more than enough to meet demand following the MTBE phase-out.

An additional 600 million bushels of corn would be processed annually into ethanol. The study concluded that, not only would the price of corn rise by at least 14 cents/bu, it would also create 13,000 jobs in the ag sector.

But as gasoline prices began to climb recently, the petroleum industry asserted that it was due to ethanol being "difficult and expensive to blend into RFG."

However, according to the Oil Price Information Service, an independent price reporting service, the wholesale price of ethanol-blended RFG is lower than the wholesale price of MTBE-blended RFG. And that price is 30-40 cents lower than the retail prices being charged to consumers, for example, in Chicago.

Vaughn offers one explanation: "The driving price factor is a supply mismanagement crisis that has left the Midwest critically short of all types of gasoline.

"Facing $30-a-barrel crude oil, refiners simply chose not to build adequate gasoline inventories. Now the refiners are forcing consumers to pay the price for their mismanagement."

He recommends that refiners offer consumer relief and extend supplies by increasing the amount of ethanol in blends. Instead of mixing just 2% oxygenate in RFGs, refiners could add 10% ethanol and stretch gasoline supplies, he says.

"I think we're within a year, maybe less, of a ban on MTBE ... and ethanol marketability/production is going to increase by anywhere from 50% to 150%," says Vaughn. "And one of the ways they (oil companies) are trying to stop it is to pin gasoline prices on ethanol. It's obnoxious, not to mention wrong."

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