The math, it appears, is tricky. How do you sell E-85 at retail at a price less than gasoline, to account for its poorer fuel efficiency, when ethanol sells for more than gasoline in the open market?
Ethanol and renewable fuels is big here in Tucson at the spring meeting of the Society of Independent Gasoline Marketers of America (SIGMA). There are 14 education sessions; 6 of them deal with renewable fuels.
In a session that focused on retailing E85, a series of questions from the floor and discussion afterward made this much clear: it's tough to put together a scenario in which spot ethanol priced at a level more than spot gasoline can somehow be translated into retail E85 priced less than retail gasoline. But it must be priced that way; the 15-25% drop in fuel efficiency dictates that.
It's clearly getting less tricky; spot ethanol assessed by Platts is not that much above spot gasoline. And when you throw in the 51 cts/gal blending credit, it's significantly less than that.
The panel featured Bill Honneff of ethanol producer VeraSun, and Bill Shireman of Chicago-area retailer Gas City. Gas City took up an offer by VeraSun to add E85 outlets at many of its stations. Shireman said that at $2.95/gal retail for unleaded, E85 is selling for about $2.55. Margins, he said, are equal between gasoline and ethanol.
Even with the recent decline in the ethanol premium over gasoline, it's still hard to do the math and figure out how that works, with everyone making money. Honneff said some of it has to do with that blenders' credit, that VeraSun yields more of the full credit when it sells its ethanol for use as E85 rather than to a refiner who blends it 10% into (usually) reformulated gasoline. And Shireman made a relatively vague comment that there was no doubt that his deal with VeraSun had helped Gas City through some times when the E85 retail economics might not have been all that favorable.
But several people in the audience conceded to The Barrel afterward that even with the blenders' credit, E85 at retail often can't make it on its own, at least not now. Somebody has to be shouldering some heavy lifting in the economics. It reminds us of that old joke: We lose money on every sale, but we make it up in volume.
If ethanol keeps falling relative to gasoline, that joke might disappear, and maybe E85 (albeit with the blenders' credit) won't need one party in a deal to regularly take on red ink as part of a market-building exercise.
The only socially correct use of ethanol, besides a stiff drink, is for MTBE replacement. E-85 is an excessive and uneconomic use for a product heavily subsidized by the taxpayer, and those who like corn flakes. Hopefully, E-85 will disappear from the landscape forever, and sooner rather than later. Ethanol production from corn is needed by the oil industry now, but when no longer needed by big oil as a substitute for MTBE, then what?