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Article Excerpt
Abstract
This article investigates ethanol and its integration into the petroleum supply chain. Recent state and federal mandates require varying levels of ethanol in reformulated gasoline (RFG) and, consequently, new complexities are being introduced into what has to this point been a streamlined petroleum supply chain. As managers and researchers work to respond effectively in this fast evolving situation, this explorative study employs a grounded theory approach (GTA) methodology and identifies five strategic priorities associated with achieving large-scale use of ethanol in RFG as a renewable energy source. The insights presented here regarding ethanol and its infusion into the petroleum supply chain provide a necessary first step in setting strategic priorities in this arena.
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In 2005, U.S. crude oil and oil product consumption amounted to nearly 21 million barrels per day (mbpd), approximately 25 percent of the world' s total consumption. The next largest world oil consumers in that same year were China and Japan, consuming about seven and five mbpd, respectively, totaling together only slightly more than half of the United States' consumption (U.S. Energy Information Administration 2007a, 2008a). Of the total U.S. crude oil and oil product consumption in 2005, approximately 60 percent came from foreign sources--60 percent was still the level from foreign sources as of 2007 (U.S. Energy Information Administration 2008b). In effect, the volume of U.S. oil consumption from foreign sources is increasing and production in the U.S. is decreasing. Statistics show that U.S. oil consumption has been increasing since 1990 at an average annual growth of 1 percent, rising from 17 mbpd in 1990 to 21 mbpd in 2007 (U.S. Energy Information Administration 2008a). In contrast to increasing consumption, U.S. crude oil production has been on a downward trend at an average annual decline of 2 percent during the same seventeen-year period, dropping from seven mbpd in 1990 to five mbpd in 2007 (U.S. Energy Information Administration 2008c).
The discrepancy between the U.S. demand and national supply for oil has left the United States increasingly dependent on foreign sources for its extensive energy needs. This situation is made more politically and economically troubling by the dramatic upward trend in crude oil prices. Oil prices have been increasing on an annual average of 23 percent since the beginning of the 21st century, rising from $20.95 per barrel in 2000, to $51.73 per barrel in 2005, and to $133.32 per barrel as of the second week of July 2008 (U.S. Energy Information Administration 2008d).
Adding to the political and economic concerns associated with U.S. energy needs is the rising tide of global warming concerns. The United States burns more fossil fuel than any other nation, and it is the burning of fossil fuel that is the greatest contributor to the increasing concentration of carbon dioxide (CO2) in the atmosphere. CO2, in turn, is a major cause of global warming (Schneider et al. 2000). In 2005, world per capita CO2 emissions from the consumption and flaring of fossil fuels were 4.37 metric tons. The United States, with about 5 percent of the world population, emitted more than four times the world average at nearly twenty metric tons of CO2 per capita in that same year. To put this figure further in perspective, the two largest countries by population, China (with 20 percent of the world population) and India (with 17 percent of the world population) emitted only a fraction of the United States' at four and one metric tons of CO2 per capita, respectively (U.S. Census Bureau 2008; U.S. Energy Information Administration 2007b). This CO2 emission level in the United States may not come as a surprise, given its extensive oil consumption, nearly half of which involves motor gasoline (U.S. Energy Information Administration 2008a). The rising energy prices, increasing U.S. dependence on foreign oil, and increasing concern about environmental impacts associated with fossil fuel consumption in the United States has heightened public interest in alternative fuels and sped approval of a series of energy bills in recent years, particularly energy bills promoting biofuels such as ethanol.
U.S. ENERGY BILLS AND THE COMING OF ETHANOL MANDATES
Given that nearly half of U.S. oil consumption involves motor gasoline (U.S. Energy Information Administration 2008a), energy bills in the United States have been principally focused on promoting alternative motor fuel sources. Biofuels, particularly ethanol, have been increasingly promoted as an alternative fuel through government incentives for domestic production (Hester 2006).
An early U.S. energy bill that focuses on alternative motor fuel is The Clean Air Act Amendments (CAAA) of 1990. CAAA of 1990 fosters the use and production of fuel ethanol through a mandate of a minimum of 2 percent oxygen content in RFG in several metropolitan areas with high levels of ground-level ozone pollution (Environmental Protection Agency 2006b, 2007). To meet this requirement, fuel oxygenates, (1) chemicals containing oxygen, are added to gasoline to make it burn more efficiently. Prior to ethanol, methyl tert-butyl ether (MTBE) was most commonly used to increase oxygen content in RFG until it was banned in the late 1990s due to a build-up of MTBE in some water supplies. Since then, ethanol has replaced MTBE as the most commonly used substance to increase the oxygen content of RFG (Environmental Protection Agency 2006b, 2007).
This requirement of oxygen content in RFG as stated in CAAA of 1990 was replaced by a Renewable Fuels Standard (RFS) in the Energy Policy Act (EPAct) of 2005, signed into law by President Bush on August 8, 2005. The RFS mandates an increasing amount of renewable fuel, defined in RFS as ethanol, to be blended into gasoline. The mandated amount of ethanol in RFG begins with four billion gallons in 2006 and escalates to 7.5 billion gallons by 2012 (Federal Energy Management Program 2007).
Even more recently, on December 19, 2007, President Bush signed into law the Energy Independence and Security Act (LISA) of 2007, originally named the CLEAN Energy Act of 2007, in accordance with his "twenty-in-ten" initiative. Announced in January 2007, the twenty-in-ten initiative aims to cut U.S. gasoline consumption by 20 percent over the coming ten years. Among the key provisions is the extent and increase of annual requirements for the amount of renewable fuels produced and used in motor vehicles. The new standard requires nine billion gallons of renewable fuels in 2008 and progressively increases to 36 billion gallons by 2022--a target that represents an aggressive nearly five-fold increase over the previous target set just two years earlier under EPAct 2005 (Office of the Press Secretary 2007). The new law further requires that, starting in 2016, advanced biofuels must be used. Advanced biofuel is defined in the LISA of 2007 as cellulosic ethanol and other biofuels derived from alternative feedstock such as corn stover, switchgrass, and woodchip (Sissine 2007).
Corresponding to the federal energy laws discussed here, state governments have followed suit through varying degrees of incentives and laws pertinent to ethanol in RFG. Table 1 shows a list of U.S. states that currently mandate and have impending mandates of the use of ethanol in RFG. As of 2006, more than one third of U.S. states have some form of RFG or ethanol legislation in place or under consideration. Of the 18 states with active ethanol and RFG initiatives, two states have already reached the point of mandating ethanol in RFG, while sixteen states have similar ethanol-based RFG mandates in the pipeline. Interested readers are recommended to visit the Alternative Fuels and Advanced Vehicles Data Center Web site for regular updates on state and federal incentives and laws related to energy in general (2008a) and ethanol as an alternative fuel in particular (2008b).
STUDY OBJECTIVES
The objective of this necessary exploratory study is to develop strategic priorities for the fast evolving petroleum supply chain in response to government mandates that require ethanol to be used as an alternative motor fuel. To this point, there have been ethanol research studies in areas other than supply chain, but none identified in this project that focus directly on the supply chain. Other studies conducted focus on ethanol production technologies, ethanol feedstock agricultural engineering, and optimal feedstock alternatives such as corn and other agricultural biomass, including switchgrass and corn stover (Pimentel et al. 2002; Sheehan et al. 2003; Core 2004;
Johnson et al. 2006; Eaves and Eaves 2007a). To achieve the nation's goals for ethanol, supply chain plays a critical role, particularly in transportation and distribution. This study is a necessary first step toward investigating the situation and identifying strategic supply chain priorities with respect to the emergence of ethanol and the petroleum supply chain.
In the balance of this article, we investigate the heart of the matter with respect to the logistics challenges of ethanol in the petroleum supply chain. This is followed by a discussion of the state of ethanol and petroleum supply chain integration. The research methodology and resulting five strategic priorities are then presented. The summary, including acknowledgement of the research limitations and suggestions for future research, concludes the article.
THE HEART OF THE MATTER--WATER, ETHANOL, AND THE PIPELINES
At the heart of the supply chain issues associated with ethanol is the fact that ethanol is easily mixed with, and consequently contaminated by, water. Coupled with this is the fact that water exists in pipelines, the current most efficient and reliable means of transporting the liquid ingredients in the petroleum supply chain (Schaffer 2004; Patel 2006). Water also exists in storage tanks and petroleum blending equipment at today's petroleum logistics facilities. Water in the pipeline systems and petroleum facilities has not been an issue in the days prior to ethanol mandates because regular gasoline...
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