“At the same time, despite the fact that crude oil imports have dropped from 60 percent to 40 percent since 2007, there is a long way to go, and the U.S. economy is still affected by swings in oil prices, prices set by world markets. Every time the cost of energy rose to over 4 percent of GDP, we have fallen into recession. We saw this in 1973-74, in 1979-80 and with the 34 percent run-up in crude oil prices in 2007-08. Here in this sector we have an opportunity to move away from an economy reliant on crude oil prices.”
Looking at the US Market and Renewable Ethanol
There is no shortage of renewable fuel production capacity — and no shortage of distribution capacity in the form of E10 and E85 outlets — to meet the original Congressional target for 2014.
What is lacking is a willingness to market E85 at reasonable prices.
Today, there’s a 40 percent spread between wholesale ethanol and wholesale gasoline prices. Yet, at the pump, consumers are being offered an average savings of only 20 percent on E85 vs gasoline, making E85 an unattractive “deal” in economic returns because of ethanol’s lower energy density. The fuel is being unfairly marked up to create the impression of a “blend wall”.
Case in point: E85prices.com reports an average price for E85 of $2.68, yet the price of wholesale E85 is as low as $1.69 from The Andersons in Iowa. That’s a 59 percent mark up. The corresponding mark-up on wholesale gasoline is just 67 cents, or 25 percent.
Where markups have been fair, E85 sales are soaring. In fact, the Iowa Renewable Fuels Association reports that Q3 sales of E85 in Iowa have doubled from Q1 totals.
“During the third quarter, Iowa motorists using E85 routinely saved $1.00 per gallon compared to regular gasoline.” stated IRFA Executive Director Monte Shaw. “But when the EPA announced their proposal to gut the 2014 RFS numbers, they gutted the incentive for retailers to promote low-cost E85. We saw the E85 price savings pull back, and it won’t be surprising if fourth quarter E85 sales taper off as well.”
If the EPA holds firm on the target, the additional ethanol fuel can find a market via E85 distribution — via 2,300 outlets and 15 million flex-fuel cars . If the EPA wavers, the obligated parties will have learned a successful strategy designed to circumvent Congressional intent.
Congress was fully informed on the blend wall issue when RFS2 was established, and the expectation was that higher blends would find a market, and that rising RIN values would be “the stick” that would ensure that it was economically the right choice to distribute E85 at fair prices.
(Note: we used NYMEX and CBOT wholesale prices (Feb 2014 contracts); the retail gasoline prices from EIA (latest available), and E85 prices from E85prices.com).
Looking at the US Market and Biomass-based Diesel
There is no shortage of biomass-based production capacity — no blend wall in sight, and no shortage of distribution capacity.
In fact, the US biodiesel industry alone is on track to produce 1.7 billion gallons in 2013, as well.
What is lacking is a recognition that consumers are motivated to cover the cost of renewable fuels, should it result in a premium at the pump.
Consumers tell the Digest — in a survey conducted this week — that they are willing to pay 3 cents per gallon more for B2 biodiesel blends, compared to fossil diesel. That’s more than the incremental cost of the fuel.
Thereby, replacing the lubricity that was lost when the US moved to ultra low-sulphur diesel. Providing cleaner air for kids in school buses. Reducing particulate emissions and CO2 emissions. Creating domestic energy jobs, keeping dollars for investment at home instead of exporting abroad, and increasing US energy security by reducing dependence on foreign oil.
Motivated customers know that these benefits comes with costs, but they are willing to pay for the benefits of renewable fuels.
This article was originally published on Biofuels Digest and was republished with permission.
Lead image: Captiol building via Shutterstock