E85 Might Succeed if Properly Priced

E85 Might Succeed if Properly Priced

E85 should be about 23% cheaper than E10 based on lower mpg.

The biggest challenge facing the ethanol industry today is one that was identified nearly 10 years ago with the passage of the Renewable Fuel Standard.

In 2005 ethanol began replacing methyl tertiary butyl ether, or MTBE, as the oxygenate component in gasoline. With the blend cap set at 10% ethanol in gasoline, economists were quick to point out that consumers would need to choose higher blends of ethanol for the industry to continue growing; Otherwise the 'blend wall' would become a reality once 10% ethanol was blended into every gallon of gasoline across the U.S. That day has, for all intents and purposes, arrived.

Iowa State University economist Bruce Babcock notes that consumer demand will increase if E85 is priced at or below parity.

Though the blend wall may fluctuate according to fuel demand, it appears to be around 13 billion gallons of ethanol.

Even so, Bob Dinneen, president and CEO of the Renewable Fuels Association, boldly claims this is the year the blend wall will fall. With E15 slowly catching on, the question is how. Dinneen also notes that only 13 million gallons of new ethanol capacity are currently under construction.

E85 should be cheaper

One seemingly simple answer to breaking down the blend wall is to do a better job pricing E85.

Iowa State University economist Bruce Babcock notes that consumer demand will increase if E85 is priced at or below parity. He defines parity as the point at which E85 equals E10 economically due to its lower energy content; it should cost less since it returns fewer miles per gallon.

If E10 (regular gasoline) is priced at $3.30 per gallon, E85 should be a max of $2.55 per gallon, Babcock notes. Instead, many stations are pricing the higher-ethanol fuel at a 15- to 25-cent reduction.

“I don’t think [E85] is a failed fuel,” Babcock notes. “I think it hasn’t been priced right.”

By his calculations, if it were priced at parity, the ethanol industry would see another 600 million gallons worth of consumer demand materialize overnight. If it were priced below parity, the number jumps to 800 million gallons.

Taking it a step further, Babcock said the fuel industry needs to do a better job marketing E85 in areas with the highest concentration of flex-fuel vehicles. By number of FFVs on the road, Texas is number one, followed by California, Florida, Michigan, Illinois, Ohio and New York.

Babcock’s numbers indicate if 3,500 new E85 stations were placed in key locations within these states, another 2 billion gallons of demand is possible. Of course, that’s if the fuel is priced at or slightly below parity.

This price parity concept is not far-fetched. Before running the numbers, Babcock researched the E85 market in Brazil. He found the same basic consumer economics exist there also.

In the end, it appears Americans are willing to buy more of this homegrown fuel. It just has to be slightly more pocketbook friendly.

- Flint is editor of Prairie Farmer

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