Less is More: E85’s moment and ethanol’s future

September 9, 2013 |

think-different“Less is more” said Mies van den Rohe. Well, Robert Browning said it first, but never mind. The aphorisms of minimalism offer some pointers for the future of E85, ethanol’s blend wall and the Renewable Fuel Standard.

The other day, we reviewed the status of the Renewable Fuel Standard — and went through some of the difficulties in distributing enough ethanol – because of the (as-dubbed) blend wall and the limited uptake (to date) of E15 ethanol blends.

One of the options for achieving sufficient ethanol distribution that RFS mandates can stay in place? That’s E85 blends of ethanol, sold to flex-fuel enabled vehicles.

For the past couple of years, E85 sales have languished, a victim of high fuel prices and limited outlets for the fuel.

Good news comes this week on that front. According to the latest figures from Iowa, E85 sales jumped 43 percent in the second quarter, from 1.83 million gallons to 2.62 million gallons.

As a percentage of Iowa’s production, it’s still low. In total, Iowa has 41 ethanol refineries capable of producing over 3.7 billion gallons annually, with one wet mill and three cellulosic ethanol facilities currently under construction. So, we’re looking at roughly 0.28 percent of state’s ethanol production — or something like 40 million gallons per year, if the figures were applied nationally.

Why down before and up now?

“E85 sales were down at the end of 2012 and beginning of 2013 due to last summer’s drought, but we’re seeing those numbers turn around now with very attractive E85 prices,” stated IRFA Executive Director Monte Shaw. “As impressive as the 43 percent increase in second quarter E85 sales was, we should see E85 sales grow even further as the price savings are even better now. I routinely pay more than $1 per gallon less than regular unleaded for E85, and that’s serious savings.”

But let’s move beyond cost per gallon and look at cost per mile. Roughly speaking, judging from the Brazilian experience, E100 ethanol generally sells well in Brazil when priced at 70% or lower than the gasoline price. That’s a reflection of the Brazilian common sense that ethanol has lower energy density, but higher octane (which can reduce the amount of fuel used, for example, in accelerating a vehicle).

So, we’ll start with 30 percent. Experts argue about the exact number from time to time — but let’s consider that the Brazilian experience provides real-life data that we can use, and generally rely on.

“God is in the details”

e85-data

Looking at the six fuel wholesale E85 offerings in Iowa, we quickly see some disparity in pricing – so we’ve loaded up all the numbers, courtesy of the Iowa Renewable Fuel Association.

The chart is pretty simple. It shows the E85 price and the ethanol content (which varies). That’s been converted into a cost per mile (using a 25 mile per gallon baseline for regular gasoline). The ethanol fuel has been discounted 30 percent to allow for energy content and the effect of higher octane and power.

We’ve compared the savings and then applied those over a standard driving year of 15,000 miles.

What did we discover?

One – price matters. E85 as distributed via Absolute Energy offers a savings compared to straight gasoline – but Valero’s is right at break-even and Heart;and’s is priced at a little bit of a loss (using our formula).

Two – you can save a bunch right now with E85. As much as 12 percent, using the Siouxland Energy mix — 11 percent with Absolute and The Andersons.

Three – a cautionary note. These are wholesale prices. Retail may vary. And so do opinions about ethanol’s MPG.

15 2 minutes can save you  15 12% or more on your car insurance fuel bill

But let’s focus on the key thing: 12 percent savings — that’s not nothing. You’d think that someone would invest something in a campaign like “you can save 12 percent on your fuel bill in 2 minutes or less” by pumping E85 instead of regular unleaded.

buffett“15 minutes can save you 15% or more on your car insurance,” after all, did pretty well for GEICO, more than tripling that company’s market share since it hit the airwaves with that marketing strategy and an English-accented gekko.

A marketing stragegy familiar to – whom? Why, Warren Buffett. He began acquiring GEICO stock in the ’80s, acquired the whole in 1996, and has made billions in the process, according to most sources.

A little imagination, some creativity, and a smart marketing strategy built around the simple idea of saving people money. Not a terrible idea to reflect on as oil prices remain stubbornly high, corn prices fall — and the question of who gets the windfall is up for debate.

Let’s Make a Deal

Should oil companies capture it in the form of low E85 wholesale, ferociously marked up at retail? To the kinds of 305 percent spreads we’ve seen in recent years between E85 and gasoline — dooming E85 to miniscule market share for years.

Should ethanol producers capture the new margins, via high fuel prices and low cron prices, and an attractive crush spread between sugar and oil?

Or, rather, should the difference be passed along to the consumer in the form of valued savings, as the US emerges from brutal economic times — building market share and fuel acceptance for the long-term, just as the Brazilians did?

If this were “Let’s Make a Deal,” here in Digestville we’d opt for Door #3. We’re sure that long-time LMAD host Monte Hall will have something special behind that Door #3, for those who take the long view along the long road.

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