More on what it takes to sell E-85 at the pump...
Soren Anderson is a doctorate candidate at the University of Michigan, specializing in biofuels. As part of his research, he's studying some of the same ethanol retail issues that were discussed Thursday here in Tucson at the spring meeting of the Society of Independent Gasoline Marketers of America.
The perspective here is interesting. National leaders can talk about supporting ethanol to wean the US off foreign oil, aid the nation's agricultural industry, and (less transparently) seek to garner voter support in Iowa, home of the first-in-the-nation Presidential caucus and a state that has been known to grow a bit of corn.
But at a certain point, you've got to sell this stuff. It’s retailers -- like those at SIGMA -- who face that challenge, out at the pumps.
All but mandating 10% use in reformulated fuel is easy. A little more difficult is selling ethanol where it's 85% of the blend. Drivers have options; anybody who can consume E-85 is driving a flex fuel vehicle, and their car can run on regular gasoline if they don’t like the price of the E-85.
What will make them choose E-85 over gasoline? That's what Anderson is studying. So he looked at data from Minnesota, which mandates 10% ethanol even in conventional gasoline and has a relatively robust E-85 industry.
At the heart of Anderson's research are two key questions: a) Given an assumed miles per gallon drop of as much as 25%, what does E-85 need to be priced at to grab market share? b) Are there a certain number of people who will buy E-85 for non-economic reasons, such as supporting farmers or displacing foreign oil, regardless of price? And looming in the background is the issue of how E-85 can be priced less than gasoline when ethanol traditionally -- though recently, not by much -- sells for more than gasoline in the spot market (before adjusting for the 51 cts/gal blenders' credit). Or as he put it: "There are people who are only willing to pay up to the mileage-adjusted price, but there is no guarantee that at wholesale, ethanol is going to be lower than gasoline."
His two main findings: even when E-85 at retail was 5% more than gasoline, E-85 consumption didn't fall to zero, though buying it at that price makes no economic sense given ethanol's poorer mileage. That demand is coming from core E-85 users who have agendas other than price, or maybe just aren't aware of ethanol's reduced fuel efficiency. (Anderson joked that maybe some Minnesota people just weren't too smart, and noted that he was from the Gopher State, so he could get away with that remark).
Secondly, the greatest elasticity in demand comes when retail gasoline is anywhere from 10-20% more than E-85, but the increase in demand flattens out as that gap reaches 25%. Anderson noted that the flattening of demand could be related to the fact that there are only so many flex-fuels vehicles on the roads, so demand can not rise inexorably even as ethanol becomes more attractive relative to gasoline.
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