Cheaper gas in the Midwest could actually be over a billion dollar risk for some states

Come 2024, eight Midwest states could be selling E15 gasoline, a more affordable fuel than the commonplace E10 found at virtually every gas station year-round. But industry experts say what should be good news for consumers could come with some expensive strings attached for drivers across the nation.

The push to bring E15 to the Plains comes after a gubernatorial tap on the shoulder by South Dakota Gov. Kristi Noem, Minnesota Gov. Tim Walz and other corn-belt governors who wrote a letter to the Environmental Protection Agency in April 2022.

The governors specifically asked the agency to rescind an eased anti-smog regulation on E10 gas, which E15 gas still has to abide by, to level the playing field on the production of both fuel types.

One public reason Noem and the seven Midwest governors want to permanently open E15 sales year-round is to save money for consumers, who suffered sticker shock from an unprecedented rise in gas prices about a year ago, largely because of sanctions placed on Russia, following the country's invasion of Ukraine in February 2022.

Corn, ethanol industry would likely benefit from E15 sales

Less publicly, however, there exists a larger likelihood that the region's corn growers would benefit from E15 sales, according to John Auers, managing director of RBN Energy, LLC and one of the most well-known refinery experts in the country.

He told the Paste BN Network that corn-growing states like South Dakota − home to POET, the largest bioethanol company in the nation − want to incentivize E15 sales to boost corn prices, ultimately benefiting the ethanol industry.

Iowa, Minnesota, Nebraska and South Dakota remain steadfast on the idea, and leaders in the four states have most recently penned another letter to the EPA requesting an emergency waiver for this summer, which would circumvent the agency's original decision to push the E15 rollout to summer 2024 if approved. Other petitioning states like Kansas and North Dakota have rescinded their requests.

"Continued availability of E15 throughout the summer of 2022 extended fuel supplies, helped avert potential shortages, and saved Americans at least $57 million in fuel costs," the governors wrote. "Drivers choosing E15 saved $0.23 per gallon on average last summer, equating to $3-$5 in savings per fill-up. The market conditions that justified emergency action last summer still exist today; indeed, fuel supplies are even tighter than they were a year ago and there is greater risk of disruption heading into summer."

Why hasn't E15 gas, legal in other states, been adopted yet in the Midwest?

But there's a reason the gasoline industry has been slow to approve of the idea. According to Aaron Smith, professor of Agricultural Economics at University of California-Davis and an expert on the petroleum industry, gas stations don't have the right infrastructure in place to store both types of fuel.

"It's legal to sell E15 at lots of markets year-round … and it hasn't happened in part because there are also challenges with logistics and storage and things like that," Smith said. "You need separate tanks to be able to store the E10 fuel and E15. And so that part of it makes me skeptical that even once we get it being legal year-round that the industry actually would jump and actually start selling the stuff year round."

Smith's concerns run parallel to the EPA's decision to postpone the governors' request to 2024. They initially requested the agency allow E15 blends to be sold at pumps this summer.

Based on previous Paste BN Network reporting, the EPA gave multiple reasons for the delay, but one major point mentioned in their proposed rule is the nation's gas supply would need to split to create a boutique fuel market for the petitioning Midwest states.

Boutique fuel market could cost Midwest up to $800M in first year, study claims

What this means for the bottom-line of producer and consumer alike is gasoline could become a more expensive fare in the Midwest.

In a study commissioned by American Fuels and Petrochemical Manufacturers, a main U.S. refining trade group, this new market could actually raise gas prices, at least in the "near term," by up to 12 cents per gallon for the Midwest.

Their commissioned study found the new fuel market could also come with a steep price tag: $500 to $800 million in the first summer alone.

Patrick Kelly, senior director of Fuels & Vehicle Policy for AFPM, told the Paste BN Network these costs are tied to the major overhaul U.S. refineries that choose to sell E15 would have to undergo.

Because E10 and E15 fuels would need to be shipped to Midwest gas stations on a bigger scale with the proposed rule, Kelly said refineries producing gasoline would need to build new storage tanks to store E15 separately, and new transportation lines would also have to be created.

This finding, as far as the consumer impact is involved, runs against the narrative grain proffered by proponents of the new fuel market, like Sioux Falls, South Dakota-based American Coalition for Ethanol, who testified Tuesday before the EPA.

"EPA conspicuously gives zero consideration to the economic impact their delay will have on E15 retailers and the consumers who use the fuel," ACE Chief Marketing Officer Ron Lamberty said. "The retailers and consumers using E15 do so because it costs 5 to 15 cents less than E10 and 40 to 75 cents less than non-ethanol gasolines. Now they’ll have to spend more for fuel during the busiest time of the year, because EPA didn’t get its work done on time."

The EPA recently issued a nationwide emergency waiver to allow the sale of the cheaper fuel for the summer driving months in 2022. However, E15 can only be found at about 2,500 gas stations across 31 states, according to the U.S. Department of Energy, whereas E10 is sold in every state.

"If you're one of the 2% of retail stations across the U.S. that currently offers E15, and you're in Midwest, this would advantage you in in the marketplace. There's no question about that," Kelly said.

However, because building the necessary infrastructure to supply a new boutique fuel on a Midwest-scale takes time and money, developing the market on a 2024 deadline would create a bottleneck on the rest of the industry, Kelly said.

Refineries, Kelly explained, would experience reduction production of gas while working to upgrade their infrastructure. Based on the results of the study, the nation would suffer a shortage of 125,000 barrels a day of gasoline and a 33,000-barrel-a-day of diesel fuel, Kelly said.

"I mean that's supply impact would be spread not just across the gasoline market, but the diesel market and other petroleum products that are coming out of the refinery because you're not able to push as much crude oil through that refinery," Kelly said.

New gas market means a $1.1 billion risk

Smith said a successful rollout of Midwest E15 could still save consumers pennies at the pump in 2024. And it's not an outright novel idea: California has its own regulations that require it to supply it's own gasoline, meaning a boutique market in the Midwest is plausible.

However, Smith noted, some notable differences exist that could pose a unique and potentially costly challenge for the Midwest. The EPA noted similar details in its proposal.

For one, California's fuel market, unlike the Midwest, is almost completely self-sufficient, according to the state's energy commission. It only imports 3 to 7% of its gas supply from other states.

Smith said South Dakota and other petitioning states at least partly rely on the nation's network of gas pipelines, which pull fuel from out-of-state refineries. Iowa, for example, often sells gas produced by refineries located in Texas.

However, the EPA cited the U.S. Energy Information Administration in its proposal, finding gasoline inventories in the Midwest "were well below the five-year average minimum, and at the end of January 2022, were the lowest recorded since 1990 which the earlies [sic] year data is available."

This discovery is what prompted the EPA to push the E15 rollout request from 2023 to 2024.

Such a low supply already puts the gasoline industry and consumers at risk, Kelly said, but a disruption scenario − refinery fire, pipeline outage, hurricane, etc. − could raise the cost of the boutique fuel market to $1.1 billion.

"This would ultimately spill over to to the neighboring states that, you know, perhaps didn't join on in this petition," Kelly said. "Because the Midwest is more dependent on Gulf Coast supply when there are those times of disruption … that has a rippling effect to the surrounding areas in these states that maybe didn't petition for this as well as into the East Coast and and global markets."