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Future of Fuels 2013 An Analysis of Government Projections Through 2040


Future of Fuels 2013 A n

A n a l y s i s

o f

G o v e r n m e n t

P r o j e c t i o n s

Copyright Š 2013, by NACS All rights reserved. No part of this publication may be reproduced or used in any form or by any means - graphic, mechanical or electronic, including photocopying, taping, recording or information storage and retrieval systems, without the prior, written permission of the publisher.

T h r o u g h

2 0 4 0


FUELS

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CONTENTS

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

Key Factors Affecting Future Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Renewable Fuels Standard Implementation Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2. Energy Sector Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3. Transportation Energy Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4. Liquid Fuels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

Vehicle Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

5. Renewable Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

6. Non-Liquid Fuels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Electric Drive Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Natural Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

46

Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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EXECUTIVE SUMMARY In December 2012, the U.S. Energy Information Administration (EIA) published the “Early Release” 2013 Annual Energy Outlook, providing projections for the energy markets through 2040. NACS, the association for convenience and fuel retailing, used EIA’s report to prepare the following analysis. Future of Fuels 2013 seeks to determine how EIA’s projections will directly affect the retail fuels market, consumer use of specific types of light duty vehicles, and the pace at which alternative fuels may gain market share. From this analysis, NACS discovered the following: • The number of registered vehicles in the United States will increase 26.7%, the number of vehicle miles traveled will increase 40% and the amount of energy consumed by the transportation sector will increase by only 1.8%. • The amount of energy required to travel one vehicle mile will drop 27.2%. • Liquid fuels (consisting of gasoline, diesel fuel and E85) will remain the dominant energy source for transportation, losing only 0.46% market share to 99.14% in 2040. • Gasoline consumption will drop 18.4% while diesel fuel will grow 27.4% and E85 will expand 1000%, but still contribute only 0.11 million barrels per day.

• The combination of new Corporate Average Fuel Economy (CAFE) standards and the Renewable Fuels Standard (RFS) will require an average of 27.4% renewable fuel content in every gallon of gasoline in 2022 in order to comply with the two regulations. • The market share dominated by gasoline powered vehicles will drop nearly 5% to 88.2%; market share will increase for diesel powered and flexible fuel (E85) vehicles, reaching 3.8% and 8.0%, respectively. • Non-liquid fuel alternatives (propane, natural gas, electricity and hydrogen) will increase market share 115%, but still only contribute 0.86% of transportation energy. • Hybrid, plug-in electric and electric vehicles are projected to have the greatest growth potential among alternative fuel vehicles, reaching a combined market share of 7.4%. • Natural gas will remain less expensive than crude oil, although the discount will not be as significant. Gas will be 3.5 times less expensive than oil, compared to six times less expensive in 2012.

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Introduction At the end of 2012, the convenience and fuel retailing industry operated 149,220 retail outlets in the United States, of which 123,289 (82.6%) sold motor fuels. The prior year, the industry generated $681.9 billion in sales, representing one of every $22 spent in the United States and contributing 4.5% of the nation’s Gross Domestic Product (GDP). Further, convenience retailers on average conduct 160 million transactions each day, complete more than 33 million fill-ups and sell 80% of the fuel consumed in the United States. Through this lens, convenience retailers have a very unique perspective on the behavior of consumers, the effect of volatile fuel prices and consumer acceptance of new fuels that may enter the market. (2013 NACS/Nielsen Convenience Industry Store Count)

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But the market is changing and many of the factors influencing that change are beyond the control of the retailers. In order to adapt to changing dynamics and service their customers as effectively and efficiently as possible, retailers need to understand where the market is heading and which fuels are likely to be the dominant products consumed by tomorrow’s drivers. Such understanding can help inform investment decisions.

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In their effort to adapt to changing dynamics, most convenience retailers are generally agnostic about which fuels they sell.

Future of Fuels 2013 is one tool available to retailers to begin evaluating future market conditions. Leveraging the projections published in the U.S. Energy Information Administration’s (EIA) “Early Release” Annual Energy Outlook 2013 (AEO2013), NACS has evaluated a variety of transportation-specific data sets to provide more specific analysis of the forecasts that will most directly affect retailers and consumers. In particular, NACS has focused on data related to fuel consumption trends, energy contribution by fuel type and vehicle fleet characteristics. EIA’s AEO2013 takes into consideration the full implementation of existing and scheduled regulations, such as the new Corporate Average Fuel Economy (CAFE) standards and the scheduled implementation of the Renewable Fuels Standard (RFS). This presents a credible projection of future trends, barring significant changes in regulations or developments in technologies that would influence future market developments. The data represented in this report, unless otherwise noted, is sourced directly from EIA’s AEO2013 Interactive Table Viewer. Other assumptions and criteria incorporated into this analysis will be identified at the time it is presented.

Key Factors Affecting Future Markets In their effort to adapt to changing dynamics, most convenience retailers are generally agnostic about which fuels they sell. But they do require that a new fuel possess a couple of fundamental attributes:

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• The fuel must be available in sufficient quantities to ensure stable supplies; • Consumers must be ready, able and willing to purchase the fuel; • The retailer must be able to store and dispense the product safely and legally; • Sales of the product should be able to deliver a return on whatever investments are required to accommodate the new fuel; and, • The market should enable retailers to compete on a level playing field. These are the basic economic principles that could convince a retailer to sell a particular fuel product. However, there are other non-economic factors that often influence the direction in which a market will turn. Most significant among these factors is the government. In July 2012, the Obama administration, through the U.S. Environmental Protection Agency (EPA) and the National Highway Transportation Safety Administration (NHTSA), finalized new regulations to control greenhouse gas emissions from vehicle tailpipes. These new rules were translated into an estimated effect on required CAFE standards that all vehicles in the United States must meet. The net effect of the policy was to increase the mandated fuel efficiency of the nation’s fleet to 54.5 miles per gallon equivalent for passenger vehicles by model year 2025.

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Corporate Fuel Economy Standards Miles Per Gallon

60 50 40 30 20 10 1978

1986

1994

2002

2010

Standard for Cars

Standard for Trucks

Actual for Cars

Actual for Trucks

In 2012, the fuel economy standard was 33.3 miles per gallon for passenger cars and 25.4 miles per gallon for light trucks. The new standard represents a 64% improvement in fuel efficiency for cars to 54.5 miles per gallon and a 57% improvement for light trucks to 39.9 miles per gallon. These new regulations are expected to have a significant influence on the composition of the light duty vehicle (LDV) fleet over the next 20 years, as well as the level of demand for various energy sources necessary to power that fleet.

2018

2024

Another regulatory requirement that has a significant influence on the composition of the fuels market is the RFS. Originally implemented in 2005 with a requirement that renewable fuels would comprise 7.5 billion gallons of the market by 2012, Congress revised the program in the Energy Independence and Security Act (EISA) of 2007. The standard now requires a mix of qualified renewable fuels, each delivering a specific reduction in lifetime greenhouse gas emissions, culminating in a minimum of 36 billion gallons by the year 2022.

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Understanding where the market may be heading will be instrumental to retailers seeking to make long-term investment decisions.

Renewable Fuels Standard Implementation Schedule Billion Gallons

Renewable Fuels

Advanced Biofuels

...as Cellulosic

2008

9.0

n/a

n/a

2009

10.5

0.6

n/a

2010

12.0

0.95

0.1

2011

12.6

1.35

0.25

2012

13.2

2.0

0.5

2013

13.8

2.75

1.0

2014

14.4

3.75

1.75

2015

15.0

5.5

3.0

2016

15.0

7.25

4.25

2017

15.0

9.0

5.5

2018

15.0

11.0

7.0

2019

15.0

13.0

8.5

2020

15.0

15.0

10.5

2021

15.0

18.0

13.5

2022

15.0

21.0

16.0

...as Biom

(Source: P.L. 110-140; Energy Information and Security Act of 2007)

The interaction of these two policies will dramatically affect the fuels convenience retailers will be selling in the next 30 years as well as the type of vehicles consumers will be driving. Understanding where the market may be heading will be instrumental to retailers seeking to make long-term investment decisions. In addition, understanding how these policies interact and the potential challenges that may derive from that interaction

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will be critical to policy makers seeking to ensure that the market operates efficiently and provides the consumer with the best value possible. This report evaluates EIA projections to determine the likely market potential for liquid and non-liquid fuels and the effect of CAFE standards on the ability of the market to successfully implement the RFS.

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mass-based diesel

Total Renewable Fuels

n/a

9.0

0.5

11.1

0.65

12.95

0.80

13.95

1.0

15.2 16.55 18.15 20.5 22.25 24.0 26.0 28.0 30.0 33.0 36.0

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Energy Sector Overview EIA’s AEO2013 forecasts a variety of factors related to energy production and consumption in the United States through 2040. Among the items it highlights are the overall dynamics of the U.S. market, which helps to evaluate the characteristics of American energy use. Below are some EIA projections for developments between 2012 and 2040 that help provide a snapshot of the potential future of America’s energy sector:

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• The U.S. population will increase more than 28%, reaching a projected total of 404 million people. • U.S. Gross Domestic Product (expressed in 2005 chained dollars) will increase 95.9% from $13.580 trillion to $26.604 trillion in 2040. • Total U.S. energy consumption is projected to increase 12.0% from 96.07 quadrillion BTUs to 107.65 quadrillion BTUs. (BTU stands for British Thermal Unit and is a standard measure of energy.) • The transportation sector’s demand for energy is projected to increase only 1.8%, from 26.78 quadrillion BTUs to 27.27 quadrillion BTUs. • The number of registered light-duty vehicles (LDV) is projected to increase 26.7% from 223.88 million to 283.65 million. • Total annual vehicle miles traveled (VMT) by LDV will increase nearly 40%, from 2.658 trillion miles to 3.719 trillion. • On a per capita basis, energy consumption is projected to drop 12.6%, transportation energy consumption will drop 9.12% and VMT will increase 9.1%.

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US Population (millions)

US GDP (billion 2005 dollars)

Total Energy (quadrillion BTUs)

2012

315.31

13580

96.07

304.68

26.78

2015

324.59

14679

97.72

301.06

27.18

2020

340.45

16859

101.04

296.78

27.30

2025

356.26

18985

102.34

287.26

26.75

2030

372.41

21355

102.81

276.07

26.35

2035

388.35

24095

104.41

268.86

26.54

2040

404.39

26604

107.64

266.18

27.27

% Change

28.25%

95.91%

12.04%

-12.64%

1.83%

In summary, EIA projects that American energy consumption will increase as the population and GDP grow, but that advances in

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Energy/Capita (million BTUs)

Total Transporta (quadrillion BTU

energy efficiency (driven primarily in the transportation sector) will mitigate the overall rate of energy consumption growth.

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ation Energy Us)

Transportation Energy/Capita (million BTUs)

LDV Stocks (millions)

LDV/Capita

LDV VMT (billions)

LDV VMT/Capita (miles)

278.76

223.88

0.88

2658

8429.80

278.14

227.64

0.86

2679

8253.49

270.19

239.33

0.79

2870

8430.02

261.38

250.74

0.73

3089

8670.63

256.30

262.43

0.69

3323

8922.96

254.19

272.93

0.65

3532

9094.89

253.34

283.65

0.63

3719

9196.57

-9.12%

26.70%

-29.14%

39.92%

9.10%

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120

$30

100

$25

80

$20

60

$15

40

$10

20

$5

0

2012

2016

2020

Total US Energy Consumption

2021

2024

2028

2032

Transportation Consumption

On a per capita basis, while individuals will become even more mobile than they are today (i.e., will drive more miles annually), they will be driving more efficient vehicles and their transportation energy

2036

2040

Trillion Dollars

Quadrillion BTUs

GDP vs BTU Consumption

$0

US GDP (Trillion 2005 dollars)

consumption will increase only moderately overall. This is possible because transportation energy consumed per mile is projected to decline 27.2%.

BTUs per Mile 12000 10000 8000 6000 4000 2000 0 2012

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2016

2020

2021

2024

2028

2032

2036

2040

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VMT vs Transportation BTU 30  

4000   3500  

25  

Billion  Miles  

20  

2500   2000  

15  

1500  

10  

1000   5  

500   0  

Quadrillion  BTUs  

3000  

2012                  2016                  2020                    2021                  2024                2028                2032                2036                2040   LDV  Miles  

Commercial  Light  Truck  Miles  

Freight  Truck  Miles  

Transporta?on  Consump?on  

These facts will have a significant effect on the business of convenience fuel retailers. If drivers will be increasing their travel distances by 9.1% but also decreasing their transportation energy consumption by 9.1%, this means that frequency of refueling visits to the local retailer are

0  

projected to decline. Consequently, retailers who want to maintain customer transaction counts must pay attention to the developing trends and make appropriate adjustments to their business strategies.

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Transportation Energy Overview Despite the 40% growth in VMT, overall transportation energy consumption is projected to remain relatively flat, with a 2012-2040 increase of only 1.8%. Meanwhile, overall energy consumption is expected to increase nearly 12.0%, indicating that energy consumption will shift to other activities.

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Transportation Energy Usage 30%

Quadrillion BTUs

35

25%

30 20%

25 20

15%

15

10%

10 5%

5 0

2012

2016

2020

2021

2024

2028

2032

2036

2040

Residential

Commercial

Industrial

Transportation Consumption

0%

Transportation % of Total Energy

40

% Transportation

The slow growth in transportation energy consumption is driven primarily by a decline in the use of energy by the light duty vehicle (LDV) segment, a 19.7% decline 2012-2040. This is offset by the increase in the number of LDVs on the road and the increase in VMT. Most other sectors remain flat throughout the projection, except freight trucks which are projected to increase energy use by 55.3%. The increased energy demand from freight trucks is understandable, considering these vehicles transport goods throughout the nation and GDP is projected to increase 95.9%.

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Transportation Energy by Use 30

Quadrillion BTUs

25 20 15 10 5 0

2012

2016

2020

2021

2024

2028

2032

2036

2040

Lubricants & Pipeline

Shipping

Bus Transportation

Military Use

Rail

Commercial Light Trucks

Air

Freight Trucks

Light-Duty Vehicles

Recreational Boats

Among the goals of the administration when promulgating the greenhouse gas and CAFE regulations in 2012 was to reduce America’s dependency on oil. Although the new regulations won’t result in a net drop in oil use in the transportation sector, they are projected to help reduce by 28.8% the amount of oil consumed per mile driven. The effects of the policy will be most dramatically

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seen in LDV consumption, where the new regulations will reduce oil consumption 19.0% from 8.4 million barrels per day in 2012 to 6.8 million in 2040. By contrast, however, freight truck usage will increase 48.3% from 2.36 million to 3.5 million barrels per day.

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9 8 7 6 5 4 3 2 1 0

14 12 10 8 6 4 2 2012

2016

2020

2021

2024

2028

2032

2036

2040

    Light-Duty Vehicles

    Commercial Light Trucks

    Freight Trucks

      Total

But vehicles, be they LDV or freight trucks, do not run on oil alone. Rather, they require a more “refined” product like gasoline, diesel fuel or some mixture of biofuels. In the future, perhaps they will operate on fuels such as electricity, natural gas, propane or hydrogen. Whichever fuel the vehicles of tomorrow demand, it will be the product that retailers must and will sell.

Total Consumption: Million Barrels per Day

Vehicle Type: Milliion Barrels per Day

Total Oil Consumption by Vehicle Type

0

EIA’s AEO2013 projects the demand for each of these fuel types as well as the quantity of vehicles that will operate on each fuel. These projections may be quite informative to retailers and policy makers alike as they prepare for future market developments.

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Liquid Fuels The changing landscape of the transportation energy market may seem alarming to some, and opportunistic to others. However, despite the fact that overall energy demand in this sector will grow by less than 2% through 2040 while vehicle miles traveled will increase 40%, one factor will remain the same: the dominant source of energy for the transportation sector will remain liquid. In fact, in the next 28 years the market share of liquid fuels (defined here as gasoline, diesel and E85) will decline by less than ½ of one percent and maintain an overwhelming 99.1% share of the market.

04 The market share of liquid fuels... will maintain an overwhelming 99.1% share of the market.

Liquid Fuels % of Total Transportation BTUs

100.0%

99.60% 99.14%

90.0%

80.0% 2012

2016

2020

2021

2024

2028

2032

2036

2040

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Fuels as % of Total LDV Energy 100.00% 99.00% 98.00% 97.00% 96.00% 95.00% 94.00% 93.00% 92.00% 91.00% 90.00%

2012

2016

2020

2021

2024

2028

2032

2036

Hydrogen

Distillate Fuel Oil (diesel)

Electricity

E85

Propane

Motor Gasoline

2040

Natural Gas

Despite this continued reliance on liquid fuels, another thing is certain: the composition of these fuels will change over time. Overall gasoline sales will decline while E85 and

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diesel fuel will expand their market share. Entering the mix in a limited fashion are non-liquid alternatives, such as natural gas, propane, electricity and hydrogen.

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Total Liquid Fuels: Gasoline, Diesel, E85 Million Barrels/Day

14 12 10 8 6 4 2 0 2012

2016

2020

2021

2024

But while the share of transportation energy contributed by liquid fuels will remain largely unchanged, the number of gallons sold is projected to change much more significantly. For the three

2028

2032

2036

2040

primary liquid fuels currently in the market, after reaching a peak demand level of 12.49 million barrels per day in 2016, the market will retract 7.4% to 11.56 million barrels in 2040.

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The effect on each type of liquid fuel varies greatly. Gasoline volumes are projected to drop 18.4% from 8.73 million barrels per day in 2012 to 7.12

in 2040. As a share of the overall liquid fuels market, gasoline will yield from a dominant 71.9% in 2012 to 61.6% in 2040.

Gasoline Million Barrels/Day

8 6 4 2 0

2012

2016

2020

2021

2024

Motor Gasoline

Filling much of the gap left by gasoline will be diesel fuel. Delivering a much more robust average fuel economy, additional diesel fuel vehicles are expected to enter the U.S. market in response to the new fuel economy standards, increasing vehicle inventories by

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2028

2032

2036

2040

80% 70% 60% 50% 40% 30% 20% 10% 0%

% of Liquid Fuels Market

10

% Liquid

421%. Meanwhile, additional freight truck miles will increase demands for diesel. As a consequence, diesel gallons consumed are projected to increase 26.4% from 3.40 million barrels per day to 4.33, increasing its share of the liquid fuels market from 28.0% to 37.5%.

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Diesel Million Barrels/Day

4 3 2 1 0 2012

2016

2020

2021

2024 Diesel

At the same time, although E85 consumption is projected to increase ten-fold by 2040, it will still only

2028

2032

2036

% of Liquid Fuels Market

40% 35% 30% 25% 20% 15% 10% 5% 0%

5

2040

% Liquid

contribute 0.11 million barrels per day and represent 0.95% of the liquid fuel market.

0.12

1.2%

0.1

1.0%

0.08

0.8%

0.06

0.6%

0.04

0.4%

0.02

0.2% 0.0%

0 2012

2016

2020

2021

2024 E85

2028

2032

2036

2040

% of Liquid Fuels Market

Million Barrels/Day

E85

% Liquid

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Vehicle Inventories Affecting the overall demand for these specific liquid fuels will be the availability of vehicles to operate on them. In 2012, gasoline vehicles dominated the market with 208.04 million units and a 92.9% market

share. By contrast, there were only 1.9 million (0.8%) light duty diesel vehicles and 10.68 million (4.8%) flex fuel E85 vehicles.

LDV Market Share by Fuel 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2012

2016

2020

2021

Gasoline

2024 Diesel

However, by 2040 these numbers are projected to shift somewhat with gasoline vehicles giving way to those powered by diesel and flex fuel engines. The market share dominated

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2028

2032

2036

2040

Flex Fuel

by gasoline vehicles will drop to 88.2% while that of diesel vehicles will increase to 3.8% and flex fuel vehicles will command 8.0%.

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Vehicle Inventories 300 250 200 150 100 50 0 2012

2016

2020

2021

2024

2028

2032

2036

2040

Flex Fuel: 95.3% Growth Diesel: 421% Growth Gasoline: 10.6% Growth

By raw numbers, gasoline powered vehicles will increase from 208 million in 2012 to 230 million in 2040; diesel powered vehicles will climb from 1.9

million to 9.9 million; and flex fuel vehicles will nearly double from 10.7 million to 20.9 million.

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Renewable Fuels The federal mandate to incorporate specific volumes of qualified renewable fuels into the fuel supply each year presents a challenge to market participants. With projected diminishing demand for transportation energy and stagnant volumes of liquid fuel sales, finding a mixture of traditional fuels with renewable fuels that is sustainable and satisfies the RFS will become increasingly difficult.

05

Currently, the use of renewable fuels in the market is largely restricted to gasoline containing 10% ethanol (E10), E85 (a mixture of gasoline containing between 51% and 83% ethanol — EIA estimates an average content of 74%), and biodiesel (containing between 2% to 5% of a biomass component). In 2011, EPA approved the sale and use of E15 (gasoline containing up to 15% ethanol) in light duty vehicles manufactured in model year 2001 and newer (E15 is not approved for small engines or older vehicles), but opposition from automobile manufacturers and some consumer groups, concerns about liabilities from the fuel manufacturers and retailers, and broad incompatibility of existing infrastructure have limited the availability of this fuel. Consequently, the market must accommodate the mandatory volumes through a mix of E10, E85 and biodiesel. To evaluate the ability of the market to comply with the RFS, it is helpful to start with a very simple evaluation — RFS mandated volumes compared to EIA projected gasoline volumes.

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Assuming the RFS mandated volumes will be achieved through the mixture of ethanol with gasoline for all but the mandated volumes of biomass based diesel fuel (the RFS mandate does not exceed 1 billion gallons), it is possible to chart the average required amount of ethanol in each gallon of gasoline. Using EIA AEO2013 projections for gasoline consumption, by the time

the RFS reaches maturity in 2022, every gallon of gasoline must contain on average 28.1% ethanol. (For years beyond 2022, this report assumes the maximum mandated volume will be 35 billion gallons plus 1 billion for biomass diesel. Actual volumes will be determined by the Environmental Protection Agency.)

Average Renewable % per Gasoline Gallon 35.0% 28.1%

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2012

2016

2020

2021

2024

As noted, however, some of the mandated volumes will be satisfied by the increased consumption of E85. Using EIA’s projected volumes for E85 and its estimated average content of 74%, it is possible to isolate

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2028

2032

2036

2040

the amount of ethanol that must be blended in non-E85 concentrations to satisfy the RFS. The role of E85, however, will only reduce the average per gallon ethanol volume by 0.7% to 27.4% in 2022.

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% Ethanol per Gallon of Gasoline (excluding E85 volumes) 35.0% 27.4%

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

2012

2016

2020

As can be deduced from this analysis, the authorization to use E15 alone will not have a significant effect on the ability of the market to accommodate the RFS volumes. For example, if every gallon of gasoline were blended with 15% ethanol, the renewable fuel volumes introduced into the market could not satisfy the RFS requirements. Products containing more than 15% renewable fuel, and perhaps as high as 30% or more, will be required to ensure compliance.

2021

2024

2028

2032

2036

2040

The effect of the RFS on the diesel market is not as dramatic, considering the schedule for including biomass based diesel in the market is capped at a mandatory 1 billion gallons. This component of the mandate is easily met by 2013 and then exceeded in subsequent years. EIA projects the market reaching a peak of 1.38 billion gallons in 2014 and then declining to a stable 1.23 billion gallons in 2016. At this rate, the average percent of biomass blended with diesel fuel will be at or below 2.0%.

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Average Biodiesel % Per Diesel Gallon 3.0% 2.5% 2.0%

2.0% 1.5% 1.0% 0.5% 0.0% 2012

2016

2020

2021

2024

2028

2032

2036

2040

Projected Volumes of Ethanol and Biodiesel 40.00

Billion Gallons per Year

35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2012

2016

2020

Biodiesel in Diesel

2021

2024

Ethanol in E85

Taken together, the EIA projections for gasoline, biodiesel and E85 present a market that must endure significant changes to successfully comply with the RFS. The following

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2028

2032

2036

2040

Ethanol in Gasoline

chart presents the projected contribution of E85 and biodiesel to the mandated volumes of the RFS, leaving the remaining gallons somehow to be blended with gasoline.

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Non-Liquid Fuels Despite the projected continued dominance of traditional and renewable liquid fuels in the U.S. transportation system, there remains considerable and growing interest in non-liquid alternatives.

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EIA’s projections are based upon currently known technologies and existing or scheduled regulations. Game changing developments could occur to alter these projections, but these are unpredictable. Therefore, EIA deals only with the known at this time, yielding a projected limited market in the future for these technologies. As such, EIA projects that the combined market share of natural gas, propane, electricity and hydrogen will contribute only 0.86% of transportation BTUs in 2040. For these fuel sources EIA is projecting electricity to provide the greatest growth potential, increasing BTU contribution by more than 8000%.

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LDV Energy Consumption - Non-Liquid 50 45

Trillion BTUs

40 35 30 25 20 15 10 5 0 2012

2016

 Natural Gas

2020

2021

2024

 Propane

Part of the limiting factor in the growth of non-liquid fuel technologies is the rate at which properly equipped vehicles enter the market. Supporting its projection concerning the use of electricity to power LDVs, EIA projects that hybrid vehicles and

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2028

 Electricity

2032

2036

2040

 Liquid Hydrogen

plug-in hybrids will contribute the greatest market growth in this alternative segment. Growth rates are extraordinary (500% and 48,000% respectively), and combined their inventories will increase from 3.42 million to 19.38 million units.

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LDV Stocks by Fuel Million Vehicles

20 15 10 5 0 2012

2016

2020

2021

2024

Electric Vehicle Hybrid Propane

2028

2032

2036

2040

Plug-in Hybrid Natural Gas Hydrogen

Electric Drive Vehicles The growth potential for electricity projected by EIA is not an anomaly. In 2012, Motor Trends bestowed upon the all-electric Tesla S its award for Car of the Year. At the same time, there continues to be significant investment by automobile manufacturers and the federal government to promote the use of electric drive vehicles. In addition, state regulations (most notably the low carbon fuel standard being implemented in California) have been designed to push the market towards low-emission, electric drive or electric-assisted vehicles. Despite this attention and the aggressive growth rates projected by EIA, electricity will remain only a niche source of energy for transportation through 2040. In fact, EIA projects electricity — via all types of hybrid and electric vehicles — will contribute only 0.3% of transportation energy in 2040.

Part of the reason for this is that hybrid vehicles continue to rely primarily on gasoline for energy, using the rechargeable electric battery to offset some of this consumption and boost overall fuel efficiency. On a vehicle basis, pure electric vehicles will be constrained to a limited niche market, with traditional gasoline hybrids, diesel hybrids and Plug-in 10 hybrids (capable of running 10 miles on battery alone) demonstrating the greatest growth in the electric drive segment. Together, electricity powered vehicles will represent 7.4% of the LDV market in 2040.

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Electric-Power LDV Vehicle Stocks Million Vehicles

25 20 15 10 5 0 2012

2016

2020

2021

2028

2032

2036

100 Mile Electric

200 Mile Electric

Plug-in 10 Gasoline Hybrid

Plug-in 40 Gasoline Hybrid

Electric-Diesel Hybrid

Electric-Gasoline Hybrid

For the electric drive segment, the average number of miles driven per person per day is an important factor in determining market potential, especially when considering plug-in and all-electric vehicles with a defined range. Plug-in hybrids are classified as delivering either 10 or 40 miles on electric power alone, and the manufacturers suggest that for many consumers this will provide

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2024

2040

the necessary range for daily driving. (All electric vehicles in 2012 were delivering around 100 miles.) This assumption was true for the average American (using total population figures and not isolating only those who drive), whose daily commute was 23.1 miles. EIA projects that by 2040, not much will have changed with the daily commute expanding to only 25.2 miles.

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Price per Million BTU (2011 Dollars) $30.00

+73.7%

$25.00

+49.9%

$20.00 $15.00 $10.00

+198.9%

$5.00 $0.00 2012

2016

2020

2021

Natural Gas

2024 Brent Crude

2028

2032

2036

2040

WTI Crude

Natural Gas The rapid increase in domestic production of natural gas and the resulting low cost of that commodity has given rise to expanded investment in production and distribution and the accelerated conversion primarily of fleet vehicles to natural gas. In addition, there are many policy makers in Washington, D.C., who have supported incentives to promote the conversion of vehicles and distribution infrastructure to accommodate natural gas either as CNG (compressed natural gas) or LNG (liquid natural gas). The driving force behind the interest in natural gas as a vehicle fuel is the high production levels reached in recent years, the vast amounts of

proven reserves and the relatively low commodity price. The dramatic increase in natural gas production in North America has rendered a market that can provide fuel at retail for nearly half the price for an equivalent unit of gasoline. As a commodity, on an estimated BTU equivalent basis, in 2012 natural gas cost approximately 1/6 the price of crude oil. Prospects for the future of natural gas largely rely upon a sustained long term cost competitive edge over crude oil and gasoline prices. EIA projects that, while natural gas will endure a 198.9% increase in price (expressed in constant 2011 dollars), it will remain approximately 3.5 times less expensive than crude oil.

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Natural Gas Light Duty Vehicles 0.3

Millions

0.25 0.2 0.15 0.1 0.05 0 2012

2016

2020

2021

Natural Gas ICE

Despite this continued advantage in cost, EIA does not project a significant increase in inventories of natural gas vehicles. In this sector, there are two primary systems – a dedicated natural gas internal combustion engine and

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2024

2028

2032

2036

2040

Natural Gas Bi Fuels

a bi-fuel vehicle that can run on natural gas or gasoline. Combined, EIA projects that these vehicles will represent only 0.17% of the LDV market in 2040.

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CONCLUSION The future of the transportation market is very unclear. Continued and significant research investments into a variety of alternative energy sources could lead to dramatic breakthroughs, viewed by many as “game changers.” Such developments could include a vehicle battery system that can deliver a range of 300 miles and be recharged to full capacity within 30 minutes. Or perhaps the installation of natural gas refueling infrastructure develops at an accelerated pace and vehicle manufacturers begin delivering high-performing CNG vehicles to satisfy a growing consumer demand. Either development (or others of similar scope) could dramatically affect the way in which consumers power their transportation needs. None of these developments can be predicted. Therefore, while not perfect, EIA’s projections are the best assessment of how the market might mature assuming no major adjustments in regulations, disruptions in market dynamics nor breakthroughs in technology.

EIA’s projection concerning the continued reliance on liquid fuels to power America’s transportation system can provide some assurance to market participants and observers that, even with the potential for unpredictable developments, gasoline, diesel and biofuels are likely to remain the dominant fuel choices for the coming decades. Yet to be determined is the extent to which this market share will erode and give way to new alternatives. It is in the best interests of those involved in the business, either as operators or as regulators, to pay close attention to the changing landscape and adapt preparations to accommodate new market realities.

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Acronyms and Abbreviations in this Report AEO2013 – U.S. Energy Information Administration’s “Early Release” Annual Energy Report for 2013 BTU – British Thermal Unit, a measurement of energy

EISA – Energy Independence and Security Act of 2007 EPA – The U.S. Environmental Protection Agency GDP – Gross Domestic Product

CAFE – Corporate Average Fuel Economy

LDV – Light Duty Vehicles (including passenger cars and light trucks)

CNG – Compressed Natural Gas LNG – Liquid Natural Gas E10 – A motor fuel containing 90% gasoline and 10% ethanol E15 – A motor fuel containing 85% gasoline and 15% ethanol E85 – A motor fuel containing between 51% and 83% ethanol, with the balance comprised of gasoline

NHTSA – The National Highway Transportation Safety Administration RFS – Renewable Fuels Standard VMT – Vehicle Miles Traveled WTI – West Texas Intermediate Crude Oil

EIA – U.S. Energy Information Administration

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