AVAILABILITY AND USE OF ALTERNATIVE FUELS

Transportation's Dependence on Petroleum and Issues Relevant to Energy Supply and Price

Since the petroleum "shocks" of the 1970s, the inflation-adjusted price of crude oil has generally declined until the spring of 2000 when prices increased due to renewed resolve by OPEC and some non-OPEC members to control crude oil supply to raise prices. Since the oil shocks of the 1970s several events combined to keep oil prices low: the end of the Cold War; a diminution in the market power of OPEC due to an increase in petroleum production from non-OPEC nations; and the cementing of U.S. security ties to the most important oil-exporting nations. Unfortunately, these developments have engendered a complacency on the part of the American public not unlike that which preceded previous oil shocks. The growing dependence of the U.S. on imported petroleum offsets the positive developments that have occurred in the global petroleum market over the past 20 years, i.e., the potential impact of a petroleum shock on the U.S. is growing regardless of its origin or whether it is politically motivated. Historically, periods of low prices have been followed by steep price spikes, of which we have just recently been reminded.

Based on information collected by the EIA in 1999, world crude oil reserves amount to about 1,000 billion barrels, and world natural gas reserves amount to about 5,140 trillion cubic feet. Of this total, the Middle East controls about 65 percent of the world's oil reserves and about 35 percent of the world's natural gas reserves (the former U.S.S.R. controls another 38 percent of the world's natural gas reserves). North American reserves of oil amount to just 6-7 percent of world reserves, and North American reserves of natural gas amount to just 5-6% of world reserves. Today, the Persian Gulf region holds about two-thirds of the entire world's known oil reserves. The U.S. imports more than 53 percent of its petroleum-much of it coming from the Persian Gulf region. EIA's Annual Energy Outlook 2000 estimates that this oil importation will increase to 62 percent by the year 2010.

The world's oil resources are as concentrated as ever in the OPEC nations, notably in the Persian Gulf. EIA projects that by 2010, OPEC's market share is likely to reach the levels of the 1970s, as its share of world supply grows from 41 percent in 1992 to 52 percent in 2000 to over 65 percent in 2020. In addition to concern about concentration of oil resources, new concerns have recently been raised that the peak in oil production could occur within ten years.⁽¹⁾ Economic growth in the Pacific rim is giving rise to a growth in world oil demand that could well lead to a short-supply situation within the next five to ten years. Recent analysis by EIA indicates that the world oil production peak may not occur for another 20 to 50 years.⁽²⁾ Regardless of when the peak is reached, crude oil prices are likely to increase significantly in advance of peak production.

The costs to the U.S. economy from a future oil price shock could be enormous. Based on analyses of previous oil shocks, recent studies have estimated the macroeconomic impacts as reducing U.S. economic activity by an average of over 2 percent per year for three to four years or more, which translates into gross national product (GNP) reductions in the range of six hundred billion dollars over three years, up to possibly $3 trillion over fifteen years if the lost economic growth were not subsequently made up.^(3),(4)

Unfortunately, unlike other energy using sectors, which have introduced substitute fuels and fuel switching flexibility since the oil shocks of the 1970s and 1980s, the transportation sector remains overwhelmingly dependent on petroleum-based fuels (approximately 95 percent of transportation energy coming from petroleum) and on technologies that provide virtually no flexibility. The transportation sector currently accounts for approximately two-thirds of all U.S. petroleum use and roughly one-fourth of total U.S. energy consumption. Highway transportation petroleum consumption has risen from 121 billion gallons per year in 1979, when CAFE was enacted, to 155 billion gallons per year in 1999 (28 percent over 20 years). EIA's Annual Energy Outlook 2000 projects U.S. dependence on imported petroleum will grow to 54 percent in 2000 and 60 percent in 2005.

In light of this dependence of the transportation sector on petroleum (and recent sharp increases in the price of gasoline), it is clear that substitution of petroleum-based transportation fuels (gasoline and diesel) by non-petroleum-based fuels ("replacement fuels," including alternative fuels such as electricity, ethanol, hydrogen, liquefied petroleum gas, methanol, and natural gas) could be a key means of reducing the vulnerability of the U.S. transportation sector to disruptions of petroleum supply and have significant benefits to the U. S. economy. Even moderate uses of alternative and replacement fuels in place of petroleum can bestow significant economic benefits by reducing the global demand and price for oil. Displacing petroleum with alternative and replacement transportation fuels helps hold down petroleum prices in two ways. First, reducing the demand for petroleum decreases the world price for oil. Although the actual impact will depend on precisely how OPEC responds, a reasonable rule of thumb is that a 1 percent decrease in U.S. petroleum demand will reduce world oil price by about 0.5 percent, in the long-run. Short-run (one year or less) impacts would be even greater, due to the short-run inelasticity of oil supply and demand.

A second benefit of increased alternative and replacement fuel use is its potential to reduce the impact of a supply shortage on prices. As evidenced in the industrial and utility sectors, the existence of alternatives to oil provides potential substitutes for oil in the event of a production cutback. Since it is precisely the non-responsiveness of transportation oil demand to oil production cutbacks that makes oil price shocks possible, increasing competition for oil by using alternative fuels reduces the ability of oil suppliers to constrain supply in order to increase the price of oil.

Availability of Alternative Fuels

The National Energy Policy Development Group, in its May 17, 2001, report on the National Energy Policy states that, "The lack of infrastructure for alternative fuels is a major obstacle to consumer acceptance of alternative fuels and the purchase of alternative fuel vehicles." The report further states that lack of infrastructure, "is also one of the main reasons why most alternative fuel vehicles actually operate on petroleum fuels, such as gasoline and diesel." The report's discussion of alternative fuel vehicles includes the statement that, "ethanol vehicles offer tremendous potential if ethanol production can be expanded." Additionally, the report states that, "a considerable enlargement of ethanol production and distribution capacity would be required to expand beyond their current base in the Midwest in order to increase use of ethanol-blended fuels."

The National Renewable Energy Laboratory reports that there are 5,236 alternative fuel refueling sites as of May 2001, with alternative fuel refueling sites in all 50 states. In comparison, there were 4,676 alternative fuel refueling sites in the U.S. in 1995. Unfortunately, while ethanol is the alternative fuel that most of the dual-fuel vehicles that have been produced can operate on, less than three percent of the alternative fuel refueling sites offer ethanol.

The Federal government, and specifically DOE, the General Services Administration and the Department of Agriculture are involved with efforts to promote the use and expansion of alternative fuels and the alternative fuel infrastructure. A major focus of these efforts is the development of different feedstocks for ethanol and on partnerships that result in the expansion of the ethanol fueling infrastructure.

DOE runs the Clean Cities Program, which unites public-private partnerships that deploy AFVs and build supporting infrastructure, with the common goal of building the alternative fuels market. Within these partnerships reside fuel suppliers, which are continually committing to providing facilities, fuels and services.

DOE also operates the Office of Fuels Development (OFD), whose primary focus is on working to reduce the cost of replacing imported oil with ethanol made from domestic resources such as corn fiber, bagasse and rice straw. OFD programs look to the longer term, with efforts investigating more advanced ethanol conversion technologies utilizing plants, trees and other feedstocks grown specifically for energy purposes. OFD also includes a vital outreach and educational effort under its purview - the Regional Biomass Energy Program (RBEP). The specific goal of the RBEP is to increase the production and use of bioenergy resources, and help to advance the use of biomass feedstocks and technologies.

DOE and the General Services Administration (GSA) are jointly managing a program called the Federal AFV USER Program, whose goal is to support the expansion of an alternative fuel infrastructure by concentrating large quantities of Federal AFVs and substantially increasing the use of alternative fuels in Federal AFVs in six selected areas: Albuquerque, NM; Denver, CO; Melbourne/Titusville/Kennedy Space Center, FL; Minneapolis/St. Paul, MN; Salt Lake City, UT; and the San Francisco Bay area.

In August 2001, the USDA announced that its agencies will use ethanol fuels in their fleet vehicles where practicable and reasonable in cost. USDA's more than 700 E-85 flex-fuel vehicles will use ethanol fuel where those vehicles operate in geographical areas that offer E-85 fueling stations, and USDA agencies will purchase or lease alternative fuel vehicles, including E-85 flex-fuel vehicles, for geographic areas that offer alternative fueling.

Presented below is information on the number of sites providing each alternative fuel and some additional information on where these sites are located.

Ethanol: There are 121 ethanol (E85) refueling sites in the U.S., up from 37 in 1995. Ethanol refueling sites can be found predominantly in the Midwest, close to the major supplies of ethanol. Efforts by DOE are underway in Minnesota to help construct a number of ethanol refueling sites. As seen with the CNG, fuel suppliers can rise to meet the demand by developing the necessary infrastructure. Although the trend in alternative fuels is in the direction of E85 use, the infrastructure has been slow to develop because these vehicles could use conventional fuel. However, it is important to note that even if relatively few of these vehicles are actually being operated on E85, it is still valuable to be increasing that capability throughout the fleet because it could potentially contribute to the future transition away from petroleum, could spur an increase in the number of E85 refueling sites, and provide consumers an alternative if there are gas shortages or gas prices increase significantly.

Further, studies have shown that refueling stations need at least 200 steady customers for any single grade in order to make profitable use of the facilities. Though large numbers of flexible-fuel vehicles are being sold, they are spread out over the entire nation, and achieving a "critical mass" of 200 that use a single refueling station is still difficult to achieve. The small number of outlets available today points out the need to intensify the E85 refueling infrastructure. In addition, it is safe to say that many people who have purchased flexible-fuel vehicles do not know they could use E85. More public education in areas where E85 refueling stations exist is needed to inform people so that they are aware they can use E85.

Methanol: There are only two methanol (M85) refueling sites in the U.S., significantly down from 88 in 1995. Both of these sites can be found in California. The total number of methanol (M85) refueling sites has been dropping in the past few years, due to the lack of M85-capable flexible-fuel vehicles.

Natural Gas: There are currently 1,237 CNG refueling sites and 44 LNG refueling sites in the U.S., up from 1,065 CNG refueling sites in 1995. Natural gas refueling stations are usually located in urban areas near the major concentrations of natural gas vehicles, and are frequently constructed on a company's site to serve its fleet vehicles.

Electricity: There are 558 electric recharging sites in the U.S., up from 188 in 1995. The vast majority of electric recharging sites can be found in the Southwest (California and Arizona), where the majority of electric vehicles are being sold. There is also a large concentration of electric recharging sites in Alabama and Georgia, where electric utilities have been proponents of electric vehicles. The availability of public refueling is not as important for electric vehicles as it is for other alternative fuels, since most (if not all) operators of electric vehicles will have a charger located at the vehicle's storage yard or garage to recharge the vehicle when it is not being used.

Liquefied Petroleum Gas (LPG): There are currently 3,270 propane sites in the U.S.. LPG is sold throughout the U.S. as a home heating fuel, and many stations offering refueling of propane tanks also offer vehicle refueling.

Biodiesel: There are currently four biodiesel refueling sites in the U.S. The National Biodiesel Board counts seven major suppliers of biodiesel as members, located mostly in the Midwest. Biodiesel can be pumped through conventional diesel refueling equipment, so widespread availability of biodiesel would not pose a major obstacle with respect to infrastructure.

As of May 2001, there were 121 public E85 refueling outlets in operation. For LPG, the most widely available alternative fuel, although it has availability in all states, there are only 3,270 outlets in the U.S. These outlets require little maintenance. There are 1,237 CNG outlets in the U.S. For M85, there are only two refueling sites remaining. There are 44 LNG outlets, and 558 electricity outlets in the U.S. As illustrated in the following table and in Appendix C, this adds up to a current total of 5,236 alternative fuels refueling stations in the U.S.

Table IV-1
NUMBER OF ALTERNATIVE FUEL REFUELING OUTLETS

The costs to retrofit an existing gasoline tank for E85 range from $5,000 to $30,000. For a new, underground tank and pump, the price ranges from $50,000 to $70,000. For LPG, the installation cost of a new outlet is $25,000 to $40,000. For CNG, the installation cost for an initial outlet is $250,000 to $500,000.

Energy Equivalence of Alternative Fuels to Conventional Fuels

The table below illustrates the amount of each alternative fuel necessary to provide the same energy as a gallon of gasoline or diesel fuel.

It is difficult to calculate a gasoline equivalency for electricity because the conversion of a fuel to energy is not done onboard the vehicle, as with an internal combustion engine, but is merely stored on the vehicle in batteries. For the purposes of the EPA Fuel Economy Guide, energy consumption by electric vehicles is reported in terms of kilowatt-hours per 100 miles. For purposes of corporate average fuel economy, a petroleum-equivalent fuel economy is calculated using a petroleum equivalence factor of 82,049 Watt-hours per gallon. This factor takes into consideration the relative efficiency of the electricity production and distribution infrastructure, the energy content of the electricity, and a fuel content factor. To illustrate the results of this calculation, the electric Ford Ranger has a city rating of 38 kWh/100 miles and a highway rating of 44 kWh/100 miles, or a combined rating of 41 kWh/100 miles. This corresponds to a petroleum-equivalent fuel economy of 202 miles per gallon using the above factor.

Fuel Prices Relative to Gasoline and Diesel

A survey of Clean Cities was conducted in April 2000 to determine average prices for alternative fuels across the nation. Table IV-3 illustrates the average retail prices determined as a result of this survey. As this table shows, compressed natural gas cost less per gasoline-equivalent gallon (GGE) than gasoline, but LPG and ethanol cost more per GGE. No price estimates were available for methanol or for biodiesel, but both would probably be more expensive than gasoline or diesel fuel.

Use of Alternative Fuels

Alternative fuel use in the U.S. has grown significantly since the passage of AMFA alternative fuel incentives, as illustrated in Table IV-4. In 1992, alternative fuel use in the U.S. amounted to 230 million gasoline gallon equivalents; in 2000, alternative fuel use is estimated to be 368 million gasoline gallon equivalents, an overall increase of 60 percent.⁽⁵⁾

As seen in Table IV-4, all of the alternative fuels have seen notable increases in use between 1992 and 2000, with the exception of methanol (neat and in M85) and ethanol in an E95 blend. The rise in CNG and LNG usage is due to an increasing number of CNG and LNG vehicles available from original-equipment manufacturers. A large increase in ethanol (in the form of E85) has also occurred, due to increased interest in E85 spurred by the large numbers of E85 flexible-fuel vehicles being produced by the domestic manufacturers.

Electricity has also enjoyed a large increase, due to the OEM offerings of electric vehicles in the Southwest.

Methanol usage and E95 usage have experienced a decline between 1992 and 2000. Methanol usage in a blend of 15 percent gasoline (known as M85) has not seen an increase, and it is likely that this alternative fuel use will decline further in the coming years, due to a lack of methanol flexible-fuel vehicles being offered. The large decrease in neat methanol use can be attributed to neat methanol's popularity as a transit bus fuel in the early 1990's and the phase-out of these vehicles within the last four or five years. The small amount of E95 (ethanol blended with 5 percent gasoline) can be attributed to a small fleet of transit buses; it is not likely at this point that this use will increase in the coming years.

Change in Rate of Alternative Fuels Consumed

Alternative fuel use in alternative fuel vehicles in the U.S. has been rising over the past decade. In 1992, EIA estimated that a total of 230 million gasoline gallon equivalents of alternative fuel were used in alternative fuel vehicles; for 2001, that number is projected to rise to 366 million gasoline gallon equivalents, or an increase of roughly 6 percent per year. In comparison, the highway use of gasoline and diesel was about 133 billion gallons in 1992, and that number is projected to rise to about 164 billion gallons in 2001, or an increase of roughly 2 percent per year. Thus, alternative fuel use in alternative fuel vehicles has been rising at a rate three times faster than the total highway use of gasoline and diesel. Nonetheless, alternative fuel use only accounts for 0.22 percent of total highway fuel use.

Alternative Fuel Use Relative to Total Energy Consumption

In 2000, according to EIA, the U.S. consumed about 99 quadrillion BTU of energy (equivalent to about 859 billion gallons of gasoline) in all of its energy-consuming activities. Transportation activities (road, air, water, and rail) represent about 27 percent of that total, or the equivalent of about 243 billion gallons of gasoline. Highway transportation consumption was about 157 billion gallons, or about 67 percent of total transportation energy usage.

Ethanol: Ethanol is used either as E85 to power flexible-fuel vehicles, or blended into gasoline to make gasohol. In 2000, the U.S. used about 1.0 billion gasoline gallon equivalents of ethanol in these two uses.

Methanol: Methanol is used either as M85 to power flexible-fuel vehicles, or as MTBE blended into gasoline as an oxygenate. In 2000, the U.S. used about 3.1 billion gasoline gallon equivalents of methanol in these two uses.

Natural Gas: In 2000, the U.S. used about 18.8 quadrillion BTU (or about 163 billion gasoline gallon equivalents) of natural gas (excluding natural gas used to make electricity). Natural gas use in transportation is estimated to represent about 0.06 percent of that total, or 98 million gasoline gallon equivalents.

Liquefied Petroleum Gas (LPG): In 2000, the U.S. used about 2.7 quadrillion BTU (or about 24 billion gasoline gallon equivalents) of LPG. LPG use in transportation is estimated to represent about 1.0 percent of that total, or 243 million gasoline gallon equivalents.

Electric: In 2000, the U.S. used about 3.4 trillion kilowatt-hours of electricity. Electric use in transportation is estimated to represent about 0.002 percent of that total, or 57 million kilowatt-hours.

Biodiesel: No estimates have currently been made of the amount of biodiesel being used in the U.S.

Ethanol Supply and Demand

Due to the water quality concerns regarding MTBE and the rapidly increasing number of E85 flexible-fuel vehicles, the supply and demand of ethanol was specifically examined. Information about current ethanol supply capacity, as well as information about ethanol plants being constructed and ethanol plants being planned, was taken from an ethanol supply and demand analysis performed for the Renewable Fuels Association. This report indicated that currently, ethanol production capacity in the U.S. is about 1.72 billion gallons per year. Plants under construction can add another 123 million gallons per year, and plants in the engineering and planning stages can add another 149 million gallons per year. The analysis assumed that the plants being constructed and the plants being planned would all be online in 2003, providing a total ethanol production capacity of about 1.99 billion gallons of ethanol per year. A straight line extrapolation results in estimated 2010 production capacity of about 2.6 billion gallons per year. This represents an increase in production capacity of about 4.3 percent per year.

Ethanol in gasohol was assumed to be a constant percentage of highway gasoline use, based on current gasohol use of 1.1 percent of highway gasoline, taken from EIA alternative fuels information. The increase in ethanol use in gasohol is due to EIA projections that gasoline use will continue to increase in the 2000-2010 time frame. It is projected that the use of ethanol in gasohol will increase from about 1.2 billion gallons in 2000 to about 1.6 billion gallons in 2010.

Based on this analysis, the ethanol supply remaining for ethanol use in flexible-fuel vehicles is the difference between the total ethanol supply and the ethanol use in gasohol. (This analysis did not make any estimates of the replacement of MTBE with ethanol in gasoline.) It is estimated that the amount of ethanol available for use in flexible-fuel vehicles increases from about 400 million gallons in 2000 to about 1 billion gallons in 2010.

MTBE Phase-out

Since ethanol is the alternative fuel that most dual-fuel vehicles are capable of operating on, it is important to note the current water quality concerns regarding MTBE, an additive used to increase the oxygen content of gasoline. If MTBE is banned as a gasoline additive and fuel producers replace MTBE with ethanol, it is uncertain if there will be enough refinery capacity to both replace MTBE and to fuel flexible-fuel vehicles a substantial portion of the time with E85. Because of this situation, along with the small number of ethanol refueling stations nationwide coupled with the growing number of vehicles capable of using ethanol entering the marketplace, some special incentives to spur the development of an E85 refueling supply and distribution network might be warranted.

Summary

EPACT was enacted to encourage the use of alternative fuels and replacement fuels (non-petroleum components of conventional fuels), by setting goals of replacing 10 percent of motor fuel use in 2000 and 30 percent of motor fuel use in 2010 with alternative fuels or replacement fuels. The intent of EPACT was to accomplish the goals through mandates that require certain fleets to purchase and use alternative fuel vehicles. EPACT does not, however, mandate any level of alternative fuel usage in the vehicles acquired. Since EPACT was enacted, alternative fuel use has risen from 230 million gasoline-gallon equivalents to 368 million gasoline gallon equivalents, and replacement fuel usage (MTBE and ethanol in gasohol) has risen from 1.9 billion gallons to 4 billion gallons. Nonetheless, while the availability and use of alternative fuels has increased since the inception of the CAFE credit incentive provision, it has not nearly kept pace with the increase in the number of alternative fuel vehicles. Due to the lagging development of the alternative fuel infrastructure, the vast majority of dual-fuel vehicles rarely operate on alternative fuel.