Is Ethanol Cheaper Than Gasoline?

 

CLICK HERE to tell the EPA to waive the ethanol mandates and  relieve pressure on our nation’s food supply, fuel prices, and vehicle fleet.

No doubt feeling the heat from record corn prices, defenders of the ethanol mandate are now claiming that ethanol is actually something that the market would embrace, without government intervention. If this were true, it would simply prove that the mandate is unnecessary. But of course it’s not true. In particular, claims that ethanol is currently “cheaper than gas” are very misleading because they ignore differences in energy content.

To give an example of what we mean, consider this recent article from Bloomberg:

Ethanol, the best-performing energy commodity this year, is cheaper than gasoline, encouraging refiners to use the biofuel even if President Barack Obama’s administration ends a requirement to do so.

A 49 cent-per-gallon discount to gasoline provides…an opportunity to profit by blending the corn-based additive into fuel, while easing prices at the pump for consumers. Marketers may use ethanol as they look for the cheapest way to boost engine performance and reduce pollution.

The most severe U.S. drought in 56 years has prompted lawmakers from both parties to ask the Obama administration to suspend the mandate because of the potential impact on food costs. Ethanol will consume 42 percent of this year’s corn crop, according to government estimates, up from 41 percent last year. The biofuel has been blended into more gasoline than ever this year, Energy Department data show.

“It’s just ingrained in the supply and distribution and it’s having a moderating effect on pump prices,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “As long as they were still allowed to use it, most would. The lower price and just the logistics of taking it out, most would still use it.” [Bold added.]

This analysis is extremely misleading. But first, note the stakes: As we put in bold above, ethanol is currently absorbing 42 percent of the corn crop. At a time of drought and record agricultural prices, the federal ethanol mandate is particularly disastrous.

Yet what of the claims that ethanol is “cheaper than gasoline” and would be used anyway? This ignores the fact that ethanol has lower energy per unit volume. Once we adjust for the fact that your car will go more miles on a gallon of conventional gas, compared to a gallon blended with ethanol, then ethanol is more expensive. Consider the following table from AAA, captured on August 28, 2012:

 

Regular

Med

Premium

E85

**E85 MPG/BTU adjusted

$3.756

$3.900

$4.042

$3.385

$4.455

 

Yes, superficially it looks like fuel with higher ethanol blends (e.g. E85, which is 85 percent ethanol and 15 percent gasoline and can only be used in flex fuel vehicles)  are currently “cheaper than gas.” But adjust the price for the difference in energy content per volume shows that the one fuel on the market that is the closest thing to pure  ethanol  is still far more expensive. As Dan Simmons quipped, “A gallon of water is cheaper than a gallon of ethanol.” This observation doesn’t mean refiners are rushing to mix water into the fuel mixture in order to boost profit margins.

In conclusion, nobody is saying that ethanol would completely disappear in the absence of federal mandates. Rather, the claim is that it is currently being supported at an artificially high level. Yet in a sense, this debate is irrelevant: The federal mandate on refiners to use ethanol is unjustified. If it simply mandates what would happen due to market forces anyway, then it is unnecessary. But if—as we suspect—it is diverting an enormous amount of corn away from food and distorting markets—then the ethanol mandate is clearly disruptive.

CLICK HERE to tell the EPA to waive the ethanol mandates and  relieve pressure on our nation’s food supply, fuel prices, and vehicle fleet.

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