Pain at the Pump

E85 prices fall victim to VEETC’s demise
By Kris Bevill | February 22, 2012

In the months leading up to the expiration of the 45-cent-per-gallon Volumetric Ethanol Excise Tax Credit, E85 retailers warned that their fuel could end up being priced out of the market as they would likely have to raise the price by 38 cents per gallon to compensate for the loss of VEETC. Because E85 gets fewer miles per gallon than conventional gasoline, a price differential is necessary in order for most drivers to justify purchasing the fuel and retailers said that without VEETC, it would be difficult to sell E85. A coalition was formed by concerned retailers and industry supporters to request that Congress extend another portion of the tax code known as the Alternative Fuel Credit and then urge legislators to modify it to allow E85 to qualify for the 50-cent-per-gallon credit. Doing so would essentially replace VEETC’s positive price influence on E85 and allow retailers to keep it cost-competitive with gasoline, according to the group.

By the end of January, no Congressional action had been taken on the Alternative Fuels Credit, but the Coalition for E85 was optimistic that Congress would eventually extend it and make it effective retroactively to Jan. 1. Once that hurdle is overcome, the group still faces the challenge of convincing lawmakers to add E85 to the list of applicable fuels. To help achieve that goal, the coalition launched a grassroots information campaign to raise awareness among consumers, offering sample letters to Congress, pump-top posters for retailers to display at their fueling stations and social media site links on its website—www.coaltionforE85.org.

For retailers who have invested millions of dollars in the installation of E85 infrastructure, the lead-up to the new year no doubt caused justifiable anxiety. However, while the potential for a crushing blow to E85 demand as a result of price hikes is still high, not all retailers were forced to immediately price E85 higher than gasoline. Mike Pearson, manager of California’s Pearson Fuels, an alternative fuel retailer who operates about 15 E85 locations in the state, said that in mid-January his company was still selling E85 at $3.49 per gallon compared to $3.59 for gasoline. The company had filled its E85 storage tanks shortly before VEETC expired, which had helped them delay price changes. But, more significantly, the price of ethanol had dropped in recent weeks while the price of gasoline had gone up, he says. “We did get one load of ethanol after the first of the year, and the price was substantially lower,” he says. “If the tax credit were still there, we would be selling a ton of E85 because we’d be able to sell it for 38 cents less than we’re selling it now. But we just don’t sell much E85 when it’s only a 10-cent difference.”

Robert Wisner, professor emeritus and biofuels economist at Iowa State University, says when considering E15’s slow entry into the market, E85 is the industry’s best current chance to beat the blend wall. But he also predicts that the loss of VEETC will raise E85 prices substantially, which could have damaging results. “It [E85] was already limited by the number of flex-fuel vehicles, by prices that generally were not fully competitive and by lack of retail outlets,” he says. “It’s one more negative that has come down on the E85 market.”

It is possible that E85 prices may remain somewhat competitive for the short-term, but for that to happen ethanol prices would need to stay low—not ideal for ethanol producers—and gas prices would need to stay high. In mid-January, Wisner noted that ethanol futures and gasoline futures were predicting ethanol at an approximate 45-cent discount to gasoline, which he interpreted as a signal that the market was attempting to adjust for the loss of VEETC. Bloated supply stocks at the end of the year also likely contributed to the drop in ethanol prices.

Lewis believes high gas prices have also helped mask the issue with E85 prices, but he expects oil prices to come down eventually, and that will spell trouble for E85 prices. “It doesn’t matter what E85 costs; it matters what gasoline costs versus E85,” he says. “We could have a 50-cent price increase tomorrow and nobody would care, as long as we had a 50-cent price increase for gas at the same time. If we had to raise our price of E85 38 cents a gallon, we’d have people complaining all day. But mostly people complain with their pocketbook. They just don’t come or they buy gas instead.” —Kris Bevill