E85 loyalty

Economist finds buyers willing to pay more

By Holly Jessen

Research showing consumers are willing to pay a premium for ethanol was published in the March issue of the Journal of Environmental Economics and Management. Soren Anderson, a Michigan State University economist, calculated that when ethanol increased 10 cents per gallon above the price of gasoline, there was only a 12 to 16 percent decrease in demand.

Frankly, Anderson was surprised at what he found. “I was expecting to see a sharp reduction in sales of E85 the moment that the price rose above the price of gasoline on an energy-adjusted basis,” he tells EPM. “But this doesn’t seem to be happening. Instead, it appears that many E85 buyers are willing to pay a premium for the fuel, and some fraction of these buyers continue to buy the fuel, even when its price rises above that of gasoline.”

Anderson developed a model based on information gathered in Minnesota from 1997 to 2006, during which nearly 5,000 monthly observations of ethanol prices and sales volumes were made at more than 200 retail gas stations. The economic analysis is one of the first to examine the way in which consumers value ethanol, Anderson says. Previous analysis assumed consumers viewed the two fuels in the same way, with ethanol and gasoline considered perfect substitutes after adjusting for the lower gas mileage of ethanol.

The findings have economically significant implications for policy decisions affecting cellulosic ethanol, he says. Looking ahead to 2022, he calculates that the cost of producing cellulosic ethanol will be considerably higher than the projected cost of gasoline. “If consumers treat gasoline and ethanol as perfect substitutes, only buying the fuel that gives them the lowest fuel cost per mile, then fuel retailers will need to price ethanol at or below the price of gasoline for consumers to buy ethanol,” he says. This means, he adds, that producers will lose money in an attempt to comply with the renewable fuel standard (RFS)—unless cellulosic ethanol is subsidized or consumers are willing to pay a premium for the fuel.

Despite the encouraging results of his study, Anderson concludes it wasn’t enough to justify the ethanol blending mandates contained in the renewable fuel standard. “This reduces substantially the simulated efficiency cost of an ethanol content standard, since some households choose ethanol without large subsidies, mitigating deadweight losses,” he says, adding that mandating ethanol blending is expensive. Another consideration is the amount of emissions ethanol actually reduces, a topic he notes is hotly debated.

Ethanol industry supporters, on the other hand, point to the role of the RFS in moderating gasoline prices, reducing imports of foreign oil and supporting growth of the advanced and cellulosic biofuels sectors. On March 27, a coalition of eight groups, including the Renewable Fuels Association and Growth Energy, sent a letter to Congressional leaders urging them to reject attempts to reduce, waive or eliminate the RFS. They pointed to a Center for Agriculture and Rural Development study that found that in the decade from 2000 to 2010, ethanol reduced gasoline prices an average of 25 cents per gallon, saving consumers $34 billion yearly. The groups also partially credited the RFS with reducing oil imports below 50 percent for the first time in 2010. Finally, they pointed to the need to bolster the second-generation biofuels industry still in its infancy. “Efforts to amend or reform the RFS would send a chilling signal to a marketplace just when the advanced and cellulosic biofuels industries are on the cusp of commercial production to help meet this nation’s energy independence and security needs,” the letter says.  —Holly Jessen

http://www.ethanolproducer.com/articles/8713/e85-loyalty

Our Take:
Here’s a very interesting study based on E85 consumer behavior right here in Minnesota. The findings are a cause for optimism about our renewable energy future, but the author’s conclusion that America’s still-growing renewable fuel production capacity can live without the requirements in RFS is premature. Killing RFS will inhibit the growth of advanced biofuels right at the moment when commercial viability is happening.

Though 80-plus percent of customers remained loyal to E85 when the price rose above that of gasoline, A) that other 12 to 16 percent are crucial to the profitability of the fuel and B) the current consumers of E85 are early adopters. These folks have flocked to cleaner-burning renewable fuel out of a sense of idealism about improving air quality, lowering carbon emissions and ending our addiction to foreign energy sources. While it’s safe to say that this type of customer will continue to be well represented among the population of drivers using E20, E30, E50 and E85, we have to realize that the customer profile will look a bit different when America is producing 36 billion gallons of renewable fuel a year (ten years from today) and ethanol has a dollar-plus advantage over the price of gasoline, per gallon. To make up for lower energy content, ethanol has to be priced about 25 percent less than gasoline. Ethanol’s continued success will depend on maintaining that price differential because for a whole group of motorists, the price will be the reason to come over to the flex-fuel pump at the gas station.

E85 use back on the rise in Minnesota

Posted by Paul Tosto on Minnesota Public Radio’s website

Back in February, I asked: Are Minnesotans voting no on E85?

I wrote, “While use of the fuel (85 percent corn-based ethanol and 15 percent gasoline) is rising in government fleets, overall E85 sales fell more than 25 percent from 2008 to 2009 following years of big increases.” Recent data from the state Commerce Department, however, show E85 consumption climbing back toward pre-recession levels. (Click on the chart for a larger view)

In the worst parts of the recession, fuel use, including E85, dropped significantly, and the cost gap narrowed between gasoline and the typically lower priced E85. Those were the chief reasons consumption dropped.

The price gap widened again earlier this year as average regular gasoline prices ran above $2.70 a gallon most of the spring in Minnesota, while E85 averaged $2.20 to $2.26, which explains why the use of E85 is on the upswing again.

I eat my words!

Comments (2)

Bravo, Sir!

Thanks for taking a second look at the numbers. We have been seeing the same trend. Recently, a Litchfield, MN station sold 1,972 gallons of E85 during a 3-hour promotion.

E85 sales are certainly coming back.

Bob Moffitt, Communications Director, Clean Fuel & Vehicle Technologies
American Lung Association in Minnesota

Posted by Bob Moffitt | July 13, 2010 3:17 PM

 Bob, thanks, I think!

I’m a free market guy at heart and still wonder about the benefits of E85 compared to its economic and environmental costs. But the fact is consumption began climbing again after my post and I needed to highlight that. Cheers.

Posted by Paul / MinnEcon | July 14, 2010 9:38 AM

 http://minnesota.publicradio.org/collections/special/columns/minnecon/archive/2010/07/e85-use-back-on-the-rise-in-minnesota.shtml

Our Take:
It’s refreshing to see someone revisit E85 in a balanced way and admit his previous judgment was off base—the writer thought sales data showed consumers dropping E85 in favor of gasoline.

 Where such expressions of opinion tend to become extremely emotional, and pundits become invested in their positions, it is wonderful to see someone in print reconsider and modify his views. Yes, now that the economic storm has passed (for the moment) E85 is once again on a growth curve.

 We do think Mr. Tosto could go a little further and look at the Department of Energy’s statistics on gasoline sales. They tell a different tale. Though over a longer period, the reduction in America’s use of gasoline has been even steeper than the slack in E85 sales.

 Here is the EIA web site:

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=A103600001&f=M

 From 1999-2003 Americans were consuming in excess of 60 million gallons of gasoline a day. Even in 2004 through 2006, significant periods of time saw sales in that range. And then the worst economic meltdown since the Great Depression happened. Americans had an epiphany—they could switch to more economical cars and drive less in order to save money they wanted to hold on to, in case the worst happened—pay cuts, job loss, business failures. Over the same period that Tosto perceived people voting against E85 with their pocketbooks, sales for gasoline were also dropping significantly.

 In mid-2009, gasoline use dropped below 50 million gallons per day for the first time since 1983, apparently reflecting not only the ongoing quiet period in economic activity, but also showing our more or less permanent change in attitude towards fuel consumption.

 Compare the latest figures for gasoline sales—in May 2010 America averaged gasoline sales of 46.17 million gallons per day. Compare that to May 2003, at the height of America’s love affair with big vehicles, when you see sales of 66.8 million gallons of gas a day. That’s a 20-plus million gallon per day drop, or a 30 percent drop in usage. 

 We wouldn’t call that America voting against gasoline. We would call it a new awareness of how we use resources, including our money.

Mr. Tosto is right to point out the price sensitivity of E85 sales. For all the somewhat intangible benefits like improved air quality (it’s tangible, but it’s incremental to the point that people can forget to notice what it is like to have nice breathable air in the Twin Cities, thanks to the universal use of E10 and the growing use of E85), it is a beneficial price difference that seals the deal for many E85 customers.

So it’s important to note that we can’t rely on economics alone to change our habits and move over to renewable energy. It is a positive thing that less fuel is being burned, but this has had a negative impact on ethanol right alongside gasoline. And that makes continuing incentives, building more infrastructure, and allowing higher blend rates all part of a comprehensive package that moves Americans into more and more domestically produced, cleaner burning renewable energy.