1. Ethanol & Petroleum: Substitute Goods or Complementary Goods
Joel Schumacher
Associate Specialist
Dept. of Ag. Economics & Economics

2. What is a substitute product?

3. What makes a good substitute?

4. Economic Principle: Substitution
Consumers substitute one product for another based on product attributes.
Price
Quality
Availability

5. What is a complementary product?

6. 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

7. Which best describes the relationship between Ethanol & Gasoline?
They are substitute goods
They are complementary goods

8. 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

9. 2011 US Energy Supply & Demand
EIA Data

10. How is Gasoline Manufactured?

11. 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

12. 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)

13. Ethanol Markets 10% or less ethanol blends 15% Blend (E15)
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

14. What is ethanol? A Substitute Product A Complement 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%

16. Substitutes for Gasoline

17. 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)

18. 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

19. Data Source: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

20. Data Source: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

21. 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

22. Data Source:

23. 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

24. Substitution & Elasticity
Demand for transportation fuels is relatively inelastic

25. Do State or Federal Governments play a role in Ethanol?

26. 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

27. Renewable Fuels Standard

28. Data Source:
And EIA’s Monthly Energy Review

29. Data Source: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

30. Why is this important?

31. 2012 Ethanol Blend Level
9.9% of Gasoline Consumption

32. Why Don’t Americans Purchase E85?
Availability??
Car Compatibility??
Price??

33. Expanding Ethanol Use E15 Blends
EPA approved E15 for 2007 and newer vehicles
October 13, 2010
EPA approved E15 for vehicles
January 21, 2011

34. 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)

35. 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
2012:

36. 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

37. Which best describes the relationship between Ethanol & Gasoline?
They are substitute goods
They are complementary goods
Not sure

38. Questions Joel Schumacher jschumacher@montana.edu 406-994-6637