E85 versus gasoline: price wars

In recent months, the retail price of E85 motor fuel, which is gasoline blended with up to 85% ethanol has fallen. While ethanol has been cheaper than regular gasoline on a per gallon basis for several years, ethanol’s lower energy content has meant on many occasions that consumers paid more per mile when using higher ethanol blends like E85. However, recent declines in E85 prices at the pump at Midwestern stations have brought E85 close to price parity with regular gasoline on an energy content level.

The price parity now means that on an energy content basis, drivers with a flex fuel vehicle, which are capable of running on fuels with higher ethanol content, can achieve a similar if not the same mileage per dollar with those who use main blend vehicles. The lowest E85 pump prices have always generally been in the Midwest, where most US ethanol is produced and which, consequently, has relatively how wholesale ethanol prices. Throughout the USA approximately 2% of all gas stations offer E85 fuel, the majority of which are of course in the Midwest.

E85 details

As E85 is less energy dense than E10 gasoline, consumers using E85 have to refuel more often. Also, they may need to travel greater distances to reach a station that offers their required blend. For these reasons, some consumers may not be willing to switch from E10 to E85 until the latter is discounted below its energy parity price. Important questions include how many consumers would not consider switching without such a discount and the size of the discount that may be required.

E85 pricing relative to gasoline depends on both ethanol production costs and the price of crude oil. Also, under the existing federal Renewable Fuel Standard, producers and importers of gasoline are obligated to acquire renewable fuel credits, known as Renewable Identification Numbers (RINs), which are generated during the production of renewable fuel. Since February of this year, the rise in RINs market has tended to reduce the price of E85 relative to E10 because production of E85 generates more RINs than production of the standard blend. As the extra RIN value of E85 is passed along through the distribution chain in the form of a price discount, E85 becomes more competitive with regular gasoline.

Adapted from press release by Claira Lloyd

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