By James Primrose

The U.S. corn ethanol sector is significant both in its size (the largest biofuel sector globally) and in its economic role in terms of absorbing a significant proportion of the U.S. corn crop and supplying a valuable animal feed component.

Gasoline demand destruction due to electric vehicle (EV) penetration (and ongoing internal combustion engine vehicle fuel efficiency) puts the current route to market for corn ethanol as a blend component into gasoline under pressure. This creates economic pressures on the U.S. corn sector and in turn political ones, given the political significance of the sector.

What if aviation could swoop in and save corn ethanol?

You might think that the U.S road transport and aviation markets are not linked. But you might be wrong. In this article we look at:

1. The possible implications of EVs market penetration in the U.S. on the U.S. sustainable aviation fuels (SAF) market,
2. The role that alcohol to jet (A2J) fuel production may play in creating “backfill” demand for corn ethanol to offset the reduced demand for blending into motor gasoline due to EV proliferation, and
3. The implications of all this for the U.S. agricultural sector.

Importantly, there are numerous parameters and interdependencies at play in these markets. This short article is intended to provide a high-level indicative overview of these topics rather than an exhaustive one. This analysis does not explicitly consider the outcome of the 2024 U.S. presidential election as it will be some time before the election results may translate into material policy changes due to competing priorities and significant entrenched interests in the current policy framework. For now, our analysis assumes that current policy frameworks remain in place. As always, Stillwater remains ready to provide more exhaustive and bespoke analyses to interested clients.

Setting the scene
As shown in Figure 1, total U.S. gasoline consumption has remained relatively stable over the last 20 years, peaking in 2017 and 2018 at 143 billion gallons per year (bgy) before the global pandemic. The portion of U.S. gasoline that is made up of ethanol, however, has surged to 14.2 bgy, or an average blend rate of 10%. This is primarily blended into gasoline in the form of E10, with additional small but increasing volumes of E15 and E85.

In addition to domestic demand, the U.S. has exported a net average 1.2 bgy of ethanol over the last couple of years, with Canada, Europe, and Asia being the key destinations.

Figure 1:  Historic U.S. gasoline consumption, ethanol consumption, net exports, and gasoline blend %

Figure 2 tells the agricultural side of the story. Prior to the pandemic disruption, some 38% of the U.S. corn crop was used for ethanol production. U.S. corn production itself has shown a consistent increasing trend, growing 1.5 fold over the last 20 years. As Figure 2 suggests, this has been primarily driven by productivity (i.e., yield) improvement vs acreage expansion, approximately a 70:30 split.

Figure 2:  Historic U.S. corn production, yield, acreage and % used for ethanol

Whither U.S. gasoline consumption?

One of the key questions is obviously centered around future U.S. gasoline consumption. In Figure 3, below, we display two perspectives. Firstly, we show The Energy Information Administration (EIA) Annual Energy Outlook (AEO) 2023 base-case,¹ widely regarded as a conservative assumption for EV penetration as it does not fully factor in the Inflation Reduction Act (IRA) EV credits.² As an alternative forecast, we have adjusted the EIA’s base case using the more bullish EV outlook from the IEA’s recent Global EV Forecast. Specifically, we have taken the IEA, EV, and EV power demand forecasts for cars and vans from the STEPS (Stated Polices Scenario).³

The two forecasts show a very different picture for future U.S. gasoline demand trends. The EIA forecasts U.S. gasoline demand declining by 1.5% per year to 2035, with an overall loss of 22 billion gallons (the full forecast out to 2050 shows gasoline demand plateauing in 2045 before slightly growing again). In contrast, the adjusted IEA forecast shows gasoline demand declining by 4% annually or ~54 billion gallons by 2035, more than double the AEO 2023 base case forecast demand destruction.

Figure 3: U.S. gasoline consumption forecasts

Implications for U.S. corn ethanol demand

To model the potential implications for U.S. corn ethanol, we also consider two scenarios for the increase in ethanol % in gasoline, and two overall U.S. ethanol supply scenarios.

Our scenarios for % ethanol in gasoline consider two different E15 penetration cases.⁴

1. Slow E15 Penetration Case: ethanol % in gasoline increases by 0.067% annually, consistent with the average rate of increase over the pre-pandemic five-year average (2015-2020). By 2035, this corresponds to an overall 11.2% ethanol in gasoline vs. 10.4% today.
2. Fast E15 Penetration Case: the U.S. reaches maximum effective E15 saturation by 2030, which is 14.75% after allowing for applications, heavy trucks and boats, that have not received EPA approval to use E15.

Our ethanol supply cases (base cases) are:

1. U.S. domestic ethanol supply as per 2023 (i.e., 14.2 bgy).
2. U.S. ethanol supply increase consistent with a 20-year trend growth of U.S. corn (2.1%) assuming ethanol’s share of the U.S. corn crop remains constant at 38%, as per the 5-year 2015-2020 pre-pandemic average.

From the parameters above, we created two base cases and four scenarios as described below and displayed in Figure 4.

Base 1: U.S. domestic ethanol supply remaining flat at 14.2 billion gallons per year.

Base 2: U.S. domestic ethanol supply increasing with U.S. corn production to maintain a constant 38% share, reaching 17 bgy by 2035.⁵

SC1:  EIA gasoline demand forecast + Slow E15 Penetration Case

SC2:  EIA gasoline demand forecast + Fast E15 Penetration Case

SC3:  IEA-adjusted gasoline demand forecast + Slow E15 Penetration Case

SC4:  IEA-adjusted gasoline demand forecast + Fast E15 Penetration Case

Figure 4: Domestic U.S. Ethanol Demand and Supply Forecasts

This analysis highlights key impacts:

1. Ethanol Surplus with EV Shift: With incremental ethanol blend increases, EV adoption will likely lead to a surplus in corn ethanol supply.
2. E15 Acceleration and Shortfall: Rapid adoption of E15 by 2030 could create a corn ethanol shortage by 2030, assuming an increase in the Renewable Fuel Standard’s renewable volume obligation. This shortfall could be offset by an increase in U.S. corn production, a reduction in ethanol exports, or maximizing current ethanol production capacity (~18 bgy).
3. Post-E15 Demand Decline: Once E15 reaches maximum adoption, EV growth will ultimately reduce ethanol demand due to gasoline demand destruction.
4. Long-Term Surplus Likely: Extending this analysis to 2050 would likely reveal even larger ethanol surpluses.
5. Challenges for Ethanol or Corn Surpluses: When they occur, the surpluses are significant and would be hard to offset with exports alone (of ethanol and/or corn), potentially requiring cuts in corn production. Lower ethanol production would also reduce the supply of distiller grains, a valuable high-protein component in animal feed. All of the above could have economic and political impacts for U.S. agriculture.

Implications for Future SAF production

Figure 5 shows how the respective corn ethanol supply surpluses could translate into SAF production if the surplus ethanol was used as A2J feedstock.⁶

Figure 5:  A2J SAF production potential using forecast U.S. domestic corn ethanol supply surplus

Conclusions

This analysis shows the potential role that A2J could play into providing an addition route to market for corn ethanol, and to close the U.S. corn balances. By 2035, depending on the scenario, this could equate to 1-4 bgy of A2J SAF demand. These scenarios demonstrate a significant potential compared to the U.S. SAF Grand Challenge of 3 billion gallons by 2030 but a limited role relative to the goal of replacing all 30 bgy of U.S. jet demand by 2050.

This potential is, of course, recognized by the U.S. government, with the current U.S. Agriculture Secretary Tom Vilsack at the opening of the Freedom Pines Fuels facility in Georgia (the world’s first A2J plant) describing SAF as a “boon” for rural economies, offering new demand for corn and reducing carbon emissions from aviation.

To be sure, A2J faces challenges, and there are numerous reasons why this forecast could be wrong, including:

• A2J economics: Given A2J’s low rate of conversion and the additional process capital and operating costs, A2J SAF needs to price at a significant premium/multiple on an equivalent energy basis to ethanol to be economic from an opportunity cost perspective. Current incentives are not sufficient to cover the necessary premium.
• Food/feed crop statue and carbon intensity (CI): Critics point to corn’s role as a food/feed crop and its mediocre CI as reasons not to use corn ethanol as a feedstock for A2J. While these points have validity, they ignore corn ethanol’s role in helping A2J to commercialize at scale and progress down its cost curve to prepare a material sector that could process second-generation / cellulosic ethanol that offers better CI and significantly improved availability not dependent on prime agricultural land, but currently subject to its own technology challenges and cost curve. In addition, corn ethanol has its own progression on CI improvement both in the cultivation and processing parts of the supply chain.
• The corn ethanol supply surplus may not occur due to a combination of some or all of the following:

1. Slower EV penetration rates,
2. The introduction and swift penetration of >E15 ethanol blends,
3. Increased U.S. corn ethanol exports,
4. A reduction in U.S. corn production (e.g., a switch from corn to soybean acres).

While unlikely, all of the above are not impossible and are subject in part to U.S. government policy, which could change depending on the new administration.

So what?

For refiners, SAF & renewable diesel producers, aviation fuel suppliers, and airlines this analysis suggests there are significant economic and political drivers propelling A2J in the U.S., particularly from 2030 onward. Irrespective of whether you regard this as a threat or an opportunity for your business, it suggests that you need to start thinking about the evolution of U.S. gasoline demand, U.S. EV penetration, ethanol blending and consumption, the U.S. corn and related markets, and all the related policies and regulations.

As always Stillwater’s seasoned experts stand ready to assist in a deeper dive on this topic. Contact us to learn more.