DOE CONCLUDES THAT REPLACING 30 PERCENT OF PETROLEUM IN 2010 IS FEASIBLE

The Energy Policy Act of 1992 (EPACT) requires the Secretary of Energy to establish a program to promote the development and use of domestic replacement fuels in light-duty vehicles. Under this program, the Secretary is required to conduct a study to determine the feasibility of producing sufficient replacement fuels to replace 10 percent of light duty motor fuel use by the year 2000 and 30 percent by 2010, with at least half of such replacement fuels being domestic fuels. The results of the study were published last year in "Assessment of Costs and Benefits of Flexible and Alternative Fuel Use in the U.S. Transportation Sector Technical Report Fourteen: Market Potential and Impacts of Alternative Fuel Use in Light Duty Vehicles: A 2000/2010 Analysis."

Year 2000: Results

The analysis of year-2000 replacement-fuel use indicates that the 10-percent motor-fuel replacement goal will likely be met without additional policies, primarily through the use of replacement fuels in gasoline. This study estimates that 0.73 million barrels per day of gasoline equivalent (MMBGE/D) of replacement fuels--that is, 10 percent of estimated year-2000 light-duty fuel demand of 7.3 million barrels per day--will be used as a result of current industry gasoline production and blending practices and the oxygenates requirements of the Clean Air Act RFG (Reformulated Gasoline) Program. Alternative-fuel vehicles are expected to play a relatively minor role, adding 0.04 MMBGE/D, or 0.5 percent, to the displacement goal.

These results are particularly sensitive to the assumptions that oxygenated RFG will make up 50 percent of the gasoline market and that Natural Gas Liquids (NGLs) and ether-based oxygenates will be included in the group of fuels known as "replacement fuels." While a significant part of the nonalcohol portion of ethers is derived from petroleum (refinery) sources, virtually all ether-based fuels are included in the EPACT statutory definition of replacement fuels.

Year 2010: Results

Several cases have been defined for the 2010 analysis. A benchmark case is defined in which alternative fuel use is equal to levels required by existing legislation. A number of analysis cases and scenarios are developed relative to this benchmark case. Two primary tax cases were analyzed in which consumers may choose alternative-fuel vehicles and alternative fuels--the first under existing fuel-tax assumptions, the "current tax" case, and the second under assumptions of equal taxes for all fuels, the "equal tax" case.

Displacing 30 percent of light-duty motor fuel use by 2010 appears feasible. However, this estimated feasibility is based on a number of assumptions that may not be realized without additional alternative-fuel initiatives, says the United States Department of Energy (DOE). With a fully established refueling infrastructure and sufficient vehicle availability, market forces would continue to support 30 percent use of alternative fuels and would sustain even higher levels as alternative-fuel vehicles assume an increasingly larger share of the total light-duty vehicle population. This "steady state" result is found to hold under a wide variety of assumptions regarding alternative-fuel prices and market behavior. In addition, substantial economic benefits are estimated to accrue in most scenarios.

However, to ensure widespread availability of vehicles and fuels, a substantial federal effort would be required during the "transition" period. Although the transition period was not studied during this part of the analysis, it is the focus of the second part, which is now under way. The nature of this transition and its likely costs are being assessed to determine the impact of various policies and to ascertain whether its costs would offset the economic benefits that would occur after the transition is complete.

In 2010, the fuels that appear to be most economic are methanol and propane (LPG). In the equal-tax case, these fuels would account for 2.3 million barrels per day, or more than 85 percent of the total use of alternative fuels. Compressed natural gas, ethanol and electricity account for the remainder.

In both the equal-tax and current-tax cases, the use of alternative fuels results in a significant reduction in United States petroleum imports. Crude oil and oil product imports decrease by more than 1 million barrels per day, or about 12 percent, in both scenarios. This result takes into account increased oil use in other sectors due to the secondary impacts of light-duty vehicle alternative-fuel use--namely, a decline in oil prices and increases in the prices of substitute fuels, such as natural gas.

In contrast to oil imports, total energy imports experience a smaller reduction, particularly in the equal-tax case. This market equilibrium analysis finds that, in 2010, methanol and a large share of propane are likely to be imported, largely from the Middle East. The analysis also finds that CNG, ethanol and electricity are not likely to be imported. On net, total energy imports would decline by 8 percent in the current-tax case and by less than 2 percent in the equal-tax case.

In long-run equilibrium, making alternative fuels and alternative-fuel vehicles available would provide an estimated net annual economic benefit of up to $10.3 billion in 2010. This level of gain would be achievable in the Reference Oil Price Scenario with tax neutrality. Much of this benefit ($4.2 billion) consists of an increase in consumer satisfaction from the availability of new classes of vehicles and less expensive fuels; the remaining $6.1 billion reflects dollar cost savings from alternative-fuel use, mainly through reduced cost of fuel imports. In addition, environmental benefits are estimated to be up to $3.7 billion annually.

Greenhouse gas emissions would not significantly change as a result of alternative-fuel use, as envisioned in the equal-tax case. This is because methanol, the dominant fuel in the equal-tax case, provides little greenhouse gas reduction and because reductions from the use of CNG and LPG are partially offset by changes in other fuels markets. However, in the current-tax case, greenhouse gas emissions from light-duty vehicles would decrease by 10 percent, primarily because of the substantial use of cellulosic ethanol.

In summary, although the DOE analysis indicates that in 2010 a competitive market could sustain a large volume of alternative-fuel use, it does not appear at present that the market will move toward such a scenario without government action. To realize any substantial use of alternative fuels by 2010, the federal government or state governments would have to take steps soon to ensure that the fuels and the vehicles would be produced in relatively large volumes--many more vehicles than would be used by government and business fleets (estimated in the year-2000 reference case). Displacing a significant portion of conventional motor fuel use by 2010 would likely require a substantial commitment, probably including government-driven mandates or incentives, to ensure the availability of both fuels and vehicles.


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