Midwest States Pose New Challenges for Gasoline Supply
With summer gasoline season upon us, refiners and gasoline distributors are now supplying the more expensive, low volatility summer gasoline grades that cause pump prices to increase in summer. This year, they include a new low volatility grade that is being supplied for the first time to motorists in several Midwest states. This is the latest development in a long story about how ethanol affects the quality and cost of gasoline. In this blog series, we delve into three things central to that story, the three big gasoline qualities – volatility, fuel economy, and octane, and we run some numbers on how the Midwest states’ move might affect gasoline economics in the future.
Off-spec fuel
Most of the gasoline we pump into our cars, SUV’s, and pickups contains 10% ethanol (E10). Few drivers are aware that much of that fuel is off-spec. In particular, it fails to meet a critical summer gasoline volatility specification. It is nevertheless legally sold because that off-spec E10 gets a special waiver. This waiver was first given in 1992 to gasoline blends containing up to 10% ethanol to help support the emerging fuel ethanol industry and it has stayed in place since then.
The waiver has been a lightning rod for research, paper studies, political and legal activity. Back in February 2024, the Environmental Protection Agency (EPA) approved a request by governors of several Midwest states to opt out of the waiver, effective April 28, 2025.
A new gasoline grade
In response to the imminent removal of the waiver in the affected Midwest states, in recent weeks, some refiners and blenders started offering a new refinery gasoline grade. That new refinery grade, when mixed with either 10% or 15% ethanol, makes finished gasoline that, for the first time in over 30 years, meets the actual summer specifications in those states without requiring a waiver.
Why did these governors want to decline their waiver this year? It’s because they want to accelerate the use of 15% ethanol (E15) gasoline, and they believe this move will help accomplish that. While the waiver was giving E10 a free pass on volatility all along, E15 was not getting the waiver. That put E15 at a competitive disadvantage compared to E10 and slowed down adoption of E15.
The two competing blends could be placed on equal footing, from a volatility standpoint, by either granting E15 the waiver too, or by taking away E10’s waiver. The first option, to give both E10 and E15 the waiver, was tried but failed, having been rejected by the courts. So the Midwest states moved to Plan B , to remove the waiver for E10, and that succeeded last year with EPA’s February 2024 ruling, which had been in the works for several years, though ethanol advocates are still pushing for a statutory fix that places them permanently on equal footing.
The volatility curve
The specification we are referring to is a gasoline volatility specification that is measured by the Reid Vapor Pressure (RVP) test. Volatility describes the tendency to evaporate — the more volatile a gasoline blend, the higher its RVP, the more of it evaporates into the air, and these evaporated volatile organic compounds contribute to ozone and smog formation on hot summer days — hence there is a maximum RVP specification.
When considering the implications of this move, it is helpful to go a level deeper into the volatility characteristics of ethanol-gasoline blends. The curve defining volatility of ethanol blends has an unusual shape. Ethanol itself (E100) is actually much less volatile than pure refinery gasoline (E0). (We will denote any ethanol-gasoline blend with a number indicating its % ethanol, so pure ethanol is E100 and pure refinery gasoline is E0.) The reason E100 is less volatile than E0 is that ethanol molecules have a polar character that tends to make them stay in the liquid phase, compared to less polar hydrocarbons.
But even though E100 is less volatile than E0, dilute blends of ethanol in gasoline (up to E10) are more volatile than E0. That non-intuitive behavior happens because, in a dilute blend, the refinery gasoline molecules obstruct the polar ethanol molecules’ natural attraction to each other in a way that makes dilute ethanol blends more prone to evaporation. The higher volatility of dilute ethanol blends is the reason E10 needed, and received the free pass in 1992, to help the newly evolving fuel ethanol industry get started.
As the ethanol content of gasoline increases above 10%, the natural attraction of ethanol molecules starts to kick back in and the volatility of richer blends starts decreasing. The best available industry data shows that E15’s volatility is indistinguishable from E10’s. E20 is slightly less volatile than E10. E50’s volatility is lower still — in fact, E50 is less volatile than even E0. And the volatility curve bends sharply downward at blend ratios above 50% ethanol.
This means the E10 gasoline we’ve been burning in our cars for decades is a worst case scenario, from a volatility standpoint, compared to any higher ethanol blend ratio. The important implication is that, if and when use of ethanol in gasoline spreads to more use of E15 and higher blends, the volatility concern will diminish and eventually disappear.
The new refinery gasoline grade introduced this spring is formulated with a lower volatility such that blended E10 or E15 meets volatility specifications without a waiver. That removes the largest barrier to wider adoption of E15.
Higher cost
The lower volatility of the new refinery gasoline grade directly increases the refinery’s cost per gallon. It also adds another E0 formulation to the already long list of products the refinery fuel supply chain must deliver to different markets at different times of the year. The costs will add up in the form of lower gasoline production, higher per-gallon cost, capital charges and higher probability of summer gasoline price spikes. New quantitative information should show up soon in price differentials for the new grade versus other gasoline grades.
The energy balance
With these competing forces, what does the overall economics of E15 versus E10 look like? Volatility is not the only factor. When considering the pros and cons of various ethanol blend ratios, we must also consider the energy content of ethanol-gasoline blends, which is the dominant factor affecting fuel economy. The energy content of ethanol, on a per-gallon basis, is only 67% of the energy content of refinery gasoline, meaning a tank full of E100 carries enough chemical energy to take you only 67% as far as a tank full of E0.
For doing fuel ethanol economics, it makes sense to do things on an energy-equivalent basis. For this purpose, it is useful to calculate an energy-equivalent ratio for ethanol-gasoline blends. Using the 67% figure, we can calculate that a tank of E10 will move your car 96.7% of the miles, compared to the same volume of E0. This is done by calculating a simple weighted average of the relative energy contents of the two components in a 10% ethanol/90% refinery gasoline blend as follows:
E10 energy equivalent ratio = 0.10 * 0.67 + 0.90 * 1 = 96.7% versus 100% E0.
This simple linear weighting also works for higher ethanol blends, for example, by just changing the weighting factors to 15%-to-85% for E15, its energy equivalent ratio computes to 95.1%:
E15 energy equivalent ratio = 0.15 * 0.67 + 0.85 * 1 = 95.1% versus 100% E0.
And similarly for E20 it is 93.4%:
E20 energy equivalent ratio = 0.20 * 0.67 + 0.80 * 1 = 93.4% versus 100% E0.
Instead of comparing things on a per gallon basis, the energy-equivalent ratio tells how to compare things on a per miles traveled basis.
Energy equivalent cost
This leads us to want to know the energy equivalent cost for ethanol-gasoline blends. That is what it would cost to travel the same distance on different blends.
If we have a tank containing 100 gallons of pure refinery gasoline, the 67% energy ratio tells us we could add 10 gallons of ethanol and remove 6.7 gallons of the original E0 to end up with 103.3 gallons of E10 with the same energy content. The cost of that energy-equivalent substitution would be the cost of 10 gallons of ethanol minus the cost of the 6.7 gallons of refinery gasoline it displaces.
Hoekstra Trading has done this kind of calculation for a wide range of cases using data from the end of 2024 when the price of ethanol was $1.71/gal and the price of refinery gasoline was $2.28/gal. The cost of making this energy-equivalent substitution for E10 was $1.82 at the end of 2024, computed as follows:
10 gal E100 * $1.71/gal E100 – 6.7 gal E0 * $2.28/gal E0 = $1.82
With the blended energy-equivalent pool volume being 103.3 gallons, the cost of this substitution per gallon of blended pool was:
$1.82 / 103.3 gal = $0.0177/gal
To the nearest tenth of a penny, the energy equivalent cost of substitution for E10 was 1.8 cents/gal. What does this number mean? It is how much more expensive the E10 blend components cost, compared to E0, in a comparison that delivers the same number of miles traveled at the end of 2024.
To a very close approximation, we can extrapolate this to say that, for higher ethanol blends, the energy-equivalent cost of ethanol substitution was 1.8 cents/gal for every 10% ethanol added — so for E10 it was 1.8 cents/gal, for E15 it was 2.7 cents/gal, for E20 it was 3.6 cents/gal, and so on. These energy equivalent cost values will, of course, change as the prices of ethanol and refinery gasoline change.
The energy equivalent cost of 1.8 cents/gal is very low compared to the corresponding number for any other kind of biofuel. In fact, it is not inconceivable that, depending on the relative prices of ethanol and refinery gasoline, the energy equivalent cost of ethanol substitution could go negative, in which case ethanol would be the only biofuel legitimately carrying its own weight economically (with no subsidy), when substituting for the petroleum product it replaces.
it is not inconceivable that, depending on the relative prices of ethanol and refinery gasoline, the energy equivalent cost of ethanol substitution could go negative, in which case ethanol would be the only biofuel legitimately carrying its own weight economically (with no subsidy), when substituting for the petroleum product it replaces.
To summarize the above, from just an ethanol volatility curve and an energy balance, we can say that, as the ethanol content of gasoline increases to blend ratios above E10, the volatility of the blended gasoline will stay the same or get better (that is, lower), and the energy-equivalent cost will get worse (that is, higher) by an amount that was 1.8 cents/gal at the end of 2024, which is much lower than the energy-equivalent cost of any other biofuel.
There are several fine points about how ethanol affects volatility and fuel economy. For example, the heat of vaporization of the fuel components, and other properties of ethanol and gasoline affect your car’s energy efficiency. These effects often come up in the debates over ethanol in gasoline. But they are small, hard to measure, and less reliably determined effects. Compared to the big effects considered above, they are hair-splitting differences.
Many other factors enter the ethanol economics equation. These include the costs for lower volatility E0 fuel production, distribution costs, effects on the price of corn, ozone formation and greenhouse gas emissions. All these topics have been studied in depth for decades. This year’s experience in the Midwest states will provide important new data on how they play out in real life.
These three things
Meanwhile, we will stick with these three things — volatility, energy content, and octane. Ethanol is an outstanding octane additive. It already contributes substantially to the U.S. octane supply and higher ethanol blends offer opportunity to further exploit the its octane value. The next blog in this series will address the economics of the ethanol octane.
Recommendation
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George Hoekstra
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