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%
Ethanol as a % of Gasoline Consumption
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
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
Price
Supply**
Supply
P**
P*
Demand
0
0
Q* Q**
Quantity
Demand for transportation fuels is relatively inelastic
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
Renewable Fuels Standard
Year
2008
2009
2010
2011
2012
2013
2022
Advanced Biofuels Details
Renewable Advanced
Biofuel
Biofuel
9.00
0.00
10.50
0.60
12.00
0.95
12.60
1.35
13.20
2.00
13.80
2.75
15
21
Cellulosic Biomass Based Undifferentiated
Biofuel
Diesel
Advanced Biofuel
0.00
0.00
0.00
0.00
0.50
0.10
0.10
0.65
0.20
0.25
0.80
0.30
0.50
1.00
0.50
1.00
0.00
1.75
16.00
0.00
5.00
Why is this important?
Ethanol as a % of Gasoline Consumption
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012 Ethanol Blend Level
 9.9% of Gasoline Consumption
Why Don’t Americans Purchase E85?
 Availability??
 Car Compatibility??
 Price??
Price Premium E85 vs. Gasoline
(Per BTU)
40%
35%
30%
25%
20%
15%
10%
5%
0%
2012
2011
2010
2009
2008
2007
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
jschumacher@montana.edu
406-994-6637
www.ampc.montana.edu