CARD Policy Brief finds E85 can overcome blend wall

By Erin Voegele | August 08, 2013

A new analysis published by Iowa State University professors Bruce Babcock and Sebastien Pouliot asserts that more effective pricing of E85 could help the U.S. overcome the looming E10 blend wall. The professors address the topic in a Center for Agricultural and Rural Development Policy Brief published in August, titled “Price It and They Will Buy: How E85 Can Break the Blend Wall.”

According to Babcock and Pouliot, several groups have called on the U.S. EPA to cut back on volume increases under the renewable fuel standard (RFS) due to the uncertainty of cost and how ethanol consumption can increase beyond the 10 percent level.

“The uncertainty centers around the position of the ‘beyond-E10’ demand curve for ethanol, which simply measures the response of ethanol consumption to lower ethanol prices at ethanol quantities above 13 billion gallons,” they wrote.

Babock and Pouliot note that there is uncertainty over ethanol demand above 13 billion gallons because we have no U.S. data to observe consumption beyond the blend wall. However, they explain that we can insight into this demand by looking at Brazilian drivers, who choose between ethanol and gasoline largely based upon the relative per-mile cost of each fuel. The professors point out one key difference between the U.S. and Brazil is that all gas stations in Brazil offer both ethanol and gasoline, while U.S. consumers oftentimes must seek out locations offering E85. The two account for that difference in their analysis.

According to the CARD Policy Brief, the analysis leads to an ethanol demand curve that suggests 1 billion gallons of E85 could be consumed if the blend was priced in a way that generates a 6 percent reduction in fuel costs. In the event the price were lowered to result in a 15 percent reduction, 2 billion gallons would be consumed.

Within the analysis, Babcock and Pouliot note that E85 sales in the U.S. have barely topped 100 million gallons. However, they stress that E85 rarely, if ever, has been priced at a level that saves consumers money. “Why would owners of flex vehicles buy a fuel that increases their fuel costs?” they ask. “Typically E85 has been priced at a level that increases fuel cost by 10 to 20 percent. As shown in our demand curve…low levels of E85 consumption should be expected when E85 is not priced to save consumers money.”

Moving forward, the professors said that it remains to be seen what the costs associated with creating infrastructure to vastly expand E85 consumption will be. However, they point out that current high renewable identification number (RIN) prices create an incentive for oil companies to increase consumption of E85, as increased consumption of E85 will reduce RIN prices. “It is likely less expensive for oil companies to subsidize expansion of E85 consumption by strategic subsidies for pumps in Texas and in other parts of the Southeast where there exist lots of flex vehicles and few E85 stations, than it is for them to continue to pay high RIN prices,” wrote Babcock and Pouliot in the policy brief.

Bob Dinneen, president and CEO of the Renewable Fuels Association, has weighed in on the analysis, pointing out that the study underscores the fact that there are workable and economic pathways around the E10 blend wall. “This analysis confirms what is already being observed in the marketplace,” continued Dinneen. “RINs are free when procured from an ethanol producer. It is not until that free RIN is detached from the gallon and begins being traded back and forth in an opaque, thinly-traded market that prices begin to rise. Ironically, though, higher RIN prices are translating into much lower E85 prices at the pump, and consumers are responding by buying more E85. In many locations today, a gallon of E85 is priced at least $1 less than regular E10. These dynamics explain why we recently saw E85 purchases in Minnesota double in just one month,” he said.