E85 Sales Would Soar If Fuel Was Priced On Parity With E10 And Had Full Access To Flex Vehicle Market, According To CARD Economists

WASHINGTON, Nov. 6, 2013 /PRNewswire/ -- A new paper by Iowa State University economists Bruce A. Babcock and Sebastien Pouliot identifies a bottleneck of too few fuel stations that offer the ethanol blend E85 along with price incongruity as two major factors that reduce the ability of E85 to help meet expanded Renewable Fuel Standard (RFS) ethanol mandates. The authors state that flex vehicles on the road are sufficient in number (they currently number 16 million) to consume 3 billion gallons of ethanol if E85 was priced at parity with E10.

Virtually every gallon of gasoline sold in the U.S. already contains a 10-percent blend of ethanol. This means that increasing ethanol consumption requires that higher blends of ethanol be consumed. Flex vehicles are capable of burning higher blends, specifically E85.

Flex vehicles constitute 7 percent of U.S. vehicles but E85 pumps that offer high ethanol blends are in only 2 percent of fuel stations. In addition to too few pumps, the distribution of flex vehicles does not match up well with the location of E85 pumps, resulting in the loss of potential market. Further, until recently E85 was priced at a level that increased drivers' fuel cost versus conventional blends which was a disincentive for flex vehicle owners to purchase E85.

While the Renewable Fuel Standard mandates renewable fuel volumes in excess of 10 percent and a flex vehicle and higher blend fuel exist that would help achieve that mandate, market conditions have not been adjusted to take advantage.

These findings are part of "How Much E85 Can Be Consumed In The United States," which is one of three papers by Babcock and Pouliot that analyze the RFS and its mandate for requiring increased volumes of renewable fuels.

"The dilemma we attempt to answer is how much E85 would be consumed if consumers had unhindered access to the E85 fuel and it was priced competitively with other fuel choices," stated Bruce Babcock, co-author of the study. "When priced at parity under these conditions, with no change to fleet size, consumption of E85 could increase to 3 billion gallons. Introducing E85 pumps in areas with large flex vehicle fleets such as Texas would also increase consumption."

The paper details how higher prices for RINs—the tradable ethanol credits that oil companies accumulate to show compliance with the Renewable Fuel Standard—create incentives to price E85 more competitively, thus increasing overall ethanol consumption levels.

The third factor affecting E85 consumption is the size of the flex vehicle fleet which is growing in number and will increase E85 consumption proportional with that growth.

The paper and its two companion pieces, "RFS Compliance: Death Spiral Or Investment In E85?" and "The Economic Role of RIN Prices" assess the complicated path that the liquid fuel industry must take to meet the federal mandate for renewable fuel volumes. Petroleum advocates have complained that a so called blend wall—the point at which the RFS mandate exceeds 10 percent of all gallons consumed in the U.S.—prevents it from meeting minimum thresholds and will trigger an industry wide reduction in sales, which will greatly increase the cost of gasoline at the pump.

About The Center For Agricultural And Rural Development (CARD)
The Center For Agricultural And Rural Development (CARD) was founded by Earl Heady in 1958 and celebrated its 55th anniversary in 2013. Located at Iowa State University, CARD conducts innovative public policy and economic research on agricultural, environmental and food issues. CARD researchers develop and apply economic theory, quantitative methods, and interdisciplinary approaches to create relevant knowledge that is communicated to policy makers and policy stakeholders.

SOURCE The Center For Agricultural And Rural Development (CARD)