The Octane Value of Ethanol Part 1- Measuring Octane Quantity With The Octane-gallon
Refiners and other gasoline enthusiasts are familiar with the concept of the octane-gallon. One octane-gallon is the quantity of octane that will raise the octane of one gallon of gasoline by one octane number.
See other blogs in this series: The Octane Value of Ethanol –
- Part 1 – Measuring Octane Quantity With the Octane-gallon
- Part 2 – Ethanol Is An Outstanding Octane Additive
This week, I saw 93 octane premium gasoline priced at $1.20/gallon higher than 87 regular gasoline in Chicago. If you choose to buy one gallon of 93 octane premium instead of buying a gallon of regular, you have chosen to purchase 6 more octane-gallons of octane, ((93-87) octane x 1 gallon), and you’ve paid $1.20 more for that additional octane. This means the retail pump price of octane in this case was $1.20/6 or 20 cents per octane-gallon.
Gasoline is a chemical soup containing 450 different chemical compounds. In oil refineries, chemical reactors refine the chemical composition of the soup in ways that increase its octane number.
If a refinery changes the chemistry of one gallon of gasoline in a way that increases its octane by 6 octane numbers, that additional refining has produced 6 additional octane-gallons of octane. Or, the refinery could refine the composition of 6 gallons in a way that increases its octane by 1 number. Either way, the additional refining has produced six more octane gallons, which come at additional refining cost.
The point I am working towards here is that the proper unit of measure for the quantity of octane is the octane-gallon.
The proper unit of measure for the quantity of octane is the octane-gallon.
Octane Economics
Economic theory uses supply and demand curves that relate prices of commodities to their quantities. Generally, a supply curve says the supply price of a commodity increases as the quantity supplied increases. That’s because additional increments of supply come at ever-increasing incremental cost.
And a demand curve says the quantity demanded decreases as the demand price increases, because a higher price drives away incremental buyers.
And the market equilibrium price is where those two curves cross, that is where the supply price equals the demand price and the quantity supplied equals the quantity demanded.
The point I am working towards here is that, when analyzing octane economics, we can use the octane-gallon as the quantity of octane in the same way we use the gallon as the quantity of gasoline or the bushel as the quantity of corn. And we can use an octane price, in $/octane-gallon, in the same way we use a fuel price in $/gallon or a corn price in $/bushel.
We can do this despite the fact that an octane-gallon is a less familiar and less tangible quantity than a gallon or a bushel.
When analyzing octane economics, we can use the octane-gallon as the quantity of octane in the same way we use a gallon as the quantity of gasoline, or a bushel as the quantity of corn.
A common parlance
While the octane-gallon is a familiar unit of measure to gasoline refiners, it is not so for farmers, grain processors, agricultural economists, politicians, or Washington lobbyists, all of whom have a strong interest in fuel economics these days. Nevertheless, it is equally relevant to ethanol when ethanol is being used as fuel. So it makes sense to get a grip on the octane-gallon.
We will now speak of 6 octane-gallons of ethanol alongside 6 octane gallons of refined gasoline.
By using this common unit of measure in the common framework of economic theory, we can simplify the mutual understanding and analysis of ethanol octane economics.
This approach was used, to my knowledge for the first time, to derive and compare the cost of refinery octane to the cost of ethanol octane in directly comparable units of $/octane-gallon. The analysis, which was sponsored and released publicly this week by Renewable Fuels Association (RFA), led to clear results and insights that are not otherwise evident.
One key result is that the production cost of ethanol octane is 1.4 cents per octane-gallon.
the production cost of ethanol octane is 1.4 cents per octane-gallon.
You may notice that the retail pump price of 20 cents per octane gallon that I calculated above is much higher than the 1.4 cent production cost of ethanol octane. In fact, it is higher by more than ten-fold! It sounds like something must be wrong — or is someone price gouging on octane?
I believe the result is correct — but that big difference must be understood by thinking through the whole octane-gallon supply chain and by comparing things apples-to-apples. (I did not say octane economics is simple, only that it is simpler when we use a common parlance).
Much of that big difference is readily explained in ways that are not surprising to those well-versed in octane economics. But one part of the difference is surprising to almost everyone — the production cost of refinery octane today is 4.5 times higher than the directly comparable production cost of ethanol octane. This implies a big economic incentive to further increase the use of ethanol in gasoline, in order to increase U.S. gasoline supply and reduce gasoline prices.
the production cost of refinery octane is 4.5 times higher than the directly comparable production cost of ethanol octane
In coming weeks, I will post more on the results and implications of the RFA report on LinkedIn. Meanwhile, I welcome input and especially critical reviews of the contents of the report from any interested readers via comments on these posts.
Recommendation
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Once you have become expertly informed of the problem, you can save your team years of redundant work by buying Hoekstra Research Report 8. We are the ones who saw this situation coming, did the research and field tests, ran the simulations and analyzed the results so you and your team can take immediate steps to increase gasoline margin capture in the Tier 3 world.
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Don’t get caught again by panic buying after the credits spike.
George Hoekstra
George.hoekstra@hoekstratrading.com
+1 630 330-8159
