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Soaring cost of gas makes ethanol blend more competitive

April 28, 2008

Prices of an alternative fuel that's had patriotic and environmental appeal--but not an economic one for motorists--have been flirting this month with gasoline on an energy-equivalent cost basis.

The sudden but often fleeting price appeal of fuel "E85," a blend of ethanol with a dash of gasoline, is due largely to gas prices soaring to nearly $4 a gallon.

At times this month, the price spread between gasoline and the less expensive E85 has been big enough to compensate for the biofuel's roughly 30 percent lower fuel economy.

For example, on April 9, the Crystal Flash at 11544 Allisonville Road in Fishers listed E85 at $2.59 a gallon, versus $3.54 for gasoline, according to E85prices.com.

After adjusting for ethanol's lower fuel economy--multiplying the E85 price times a 1.41 conversion factor government scientists are fond of--the cost of E85 was just 11 cents higher than for gas.

That spread is practically nothing to those who want to poke Big Oil in the eyes, or who want ethanol's higher octane and cleaner tailpipe emissions.

To them, breaking the energy-efficiency barrier is the equivalent of smashing the sound barrier.

"Right now, it's a very favorable market. I hate to get too confident, though," said Kellie Walsh, of Mooresville, executive director of Central Indiana Clean Cities Alliance, a government-industry partnership sponsored by the U.S. Department of Energy.

Turbulent prices

Caution is well-founded when riding the roller coaster that is the energy market.

Indeed, by late April, E85 didn't look like such a bargain.

The same Crystal Flash station sold E85 for 30 cents more and gas for a dime more, making E85 42 cents more expensive than a gallon of gas after factoring in the biofuel's lower efficiency.

The spread was even worse a few days later at a Meijer gas station at Pike Plaza road. Though E85 was 50 cents cheaper at the pump, the cost after running the energy-equivalent calculation was 79 cents higher than for gasoline.

Oddly enough, though, these schizophrenic price spreads may amount to progress in the emerging biofuels industry.

Walsh remembers the days when E85 was priced higher at the pump than gasoline. Convincing gas stations to even consider allocating a tank for E85 meant repeatedly waving state or federal grant applications under their noses.

A more favorable E85 environment "is much better for helping consumers embrace ethanol," said Indiana Agriculture Director Andy Miller.

His office says the state's seven operating ethanol plants and nearly a dozen planned or under construction represent nearly $2 billion in capital investment and could generate more than 670 jobs.

They'd better, if political butts don't want a blistering. Farmers have come to enjoy a higher price for their corn, thanks to increased demand from ethanol plants.

"Finding new ways of using ethanol continues to be the biggest challenge facing the industry right now," Miller added.

Indeed, ethanol production in the United States has soared: 6.4 billion gallons last year from 1.6 billion in 2000. Production this year could hit 9 billion gallons. And driving further investment is legislation signed last year by President Bush that requires fuel producers to supply at least 36 billion gallons of renewable fuels by 2022.

"The production is growing exponentially. The market needs to find a way to [motivate] us to use it," said, Dermot Hayes, a professor of agriculture and economics at Iowa State University.

Appetite for E85?

Visits to local gas stations in the last few days found E85 pumps standing as lonely sentinels.

One problem, according to Walsh, is that few motorists even known whether their vehicles can burn E85. The fuel consists of 85 percent ethanol, which is an alcohol distilled from corn. The other 15 percent is gasoline.

U.S.-based automakers sell so-called flex-fuel vehicles. These include versions of the Chevrolet Impala and Tahoe, Dodge Grand Caravan, Jeep Grand Cherokee and Ford F-150 and Crown Victoria. Ethanol proponents aren't sure exactly how many are on the road in Indiana.

Flex-fuel vehicles are priced virtually the same as gasoline-only cars. Beefier fuel lines are the primary difference.

At a convention of the Indiana Petroleum Marketers & Convenience Store Association this month in Indianapolis, fuel station operators Todd J. Lassus and Don A. Good looked blank-faced at each other when asked whether E85 sales are picking up.

Lassus, president of the Lassus Handy Dandy stores in Fort Wayne, said E85 is selling about the same as his premium gasoline. He categorizes E85 customers three ways: those who are conscious of its price relative to gas, the "greenie," and "the patriot" who doesn't want to support foreign oil.

Ultimately, though, "The number one thing that drives [sales] is price, at the end of the day."

Good, owner of Good Oil Co. in Winamac, said he could probably make more money selling something other than E85. But, he added, "You want to get in the front end of doing something right."

Demand as gas additive

Right now, what ethanol might most be doing right is lowering the cost of gasoline.

Only about 150 million gallons of the nearly 9 billion gallons of ethanol produced in the United States is used to make E85, according to the Washington, D.C.-based Renewable Fuels Association.

The majority of the ethanol is used as a fuel additive. Gasoline refiners flocked to it a few years ago when the federal government banned the additive MTBE. Up to 10 percent ethanol can be blended into ordinary gasoline without harming conventional vehicles [some research now suggests 20 percent is OK]. As ethanol displaces gasoline, it helps reduce gasoline prices.

The RFA argues that oil and gas prices worldwide would be up 15 percent without biofuels.

One economic premise is less assailable: Ethanol means jobs and investment. Not too many years ago, "we thought we would be lucky getting [just] three, 100-million gallon ethanol plants," said agriculture chief Miller.

The seven active Indiana plants have a total capacity of 500 million gallons. State officials see that number closing in on 1 billion gallons as previously announced plants go on line.

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