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Low gas prices hurt sales of high-ethanol E85 fuel

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Photo by AP Photo/Jim Mone

This July 9, 2009 photo shows Ethanol E-85 enthusiast Donald O. Brown talking to a motorist in Minneapolis where he tried to convince her to try the high-ethanol blend of E85. In Minnesota, the nation's leader in E85 pumps, state figures show that E85 sales in May were less than half what they were in the same month last year.

MINNEAPOLIS — Lower gasoline prices, while a boon for drivers, were a gut punch for ethanol producers and promoters of the high-ethanol blend known as E85.

In Minnesota, the nation's leader in E85 pumps, sales fell off by more than half this spring compared with the year before, a disappointment to E85 producers and the farmers who supply them with corn to make the fuel. It's also a letdown for those who hoped the blend would provide a cleaner alternative to gasoline and accelerate the move away from fossil fuels.

When the price of gasoline falls, drivers of flex-fuel vehicles are less likely to choose E85 because the blended fuel's price advantage is reduced. Alternative fuel supporters, however, say they expect E85 sales to bounce back as gas prices rise again.

E85, which is 85 percent ethanol and 15 percent gasoline, can be used in the nearly 8 million flex-fuel vehicles on U.S. roads today. Corn and ethanol producers have promoted it heavily as a way to boost demand for ethanol beyond what's possible with the maximum 10 percent blend that's OK for any car.

The fuel is sold in all but a handful of states, but Minnesota has the most pumps, more than 350. It's followed by Illinois with about 200, and Wisconsin, Iowa and Indiana with about 120 each.

Three years ago, Minnesota Gov. Tim Pawlenty set a goal of 1,800 E85 pumps across the state by 2010. The state clearly isn't going to reach that goal — it's only about 20 percent of the way there.

"It's important for any politician to set a lofty goal, something audacious," said Bob Moffitt, spokesman for the American Lung Association of the Upper Midwest. "That's the only way real progress is made. You have to be something of an optimist in the alternative fuels world, otherwise the hard realities will beat you down."

The U.S. ethanol industry has been staggered by high corn prices, low wholesale ethanol prices and the credit crunch. Major producers such as South Dakota-based VeraSun Energy Corp. went bankrupt.

Minnesota sales of E85 fell 52 percent from 1.84 million gallons in May 2008 to 879,000 gallons in this May, according to the most recent Minnesota Department of Revenue figures available. The dip in overall gasoline sales in that period was much smaller — down just 3 percent, to 192 million gallons.

Not all major E85 states compile detailed sales numbers, or they compile them differently and on different schedules. But in Illinois, sales of all high-percentage biofuel blends, which are mostly E85 sales, plummeted 89 percent from 1.55 million gallons in May 2008 to 177,000 gallons last December before rising to 239,000 in March, according to the Illinois Department of Revenue.

In Iowa, E85 sales dropped from 2.2 million gallons in the second quarter of 2008 to 1.9 million gallons in the fourth quarter, revenue department figures showed.

The sharp but temporary drop in gasoline prices late last year was the major reason for the drop in E85 sales because it reduced E85's price advantage. A gallon of ethanol contains less energy than a gallon of gasoline, so a flex-fuel vehicle burning E85 generally gets mileage about 15 percent to 20 percent lower than it would from gas.

Flex-fuel drivers tend to be very price-sensitive, so E85 needs to be about 40 cents per gallon cheaper to be competitive, Moffitt said. The average price difference nationwide was 48 cents in June compared with 6 cents in December, according to E85Prices.com.

With gas prices going back up, Moffitt said E85 sales seem to have bottomed out last winter and are starting to come back — and the long-term outlook is positive.

"We are so far ahead of where we were six years ago," he said. "We sell more in a month now than we did (in an entire year) six years ago," he said.

The Renewable Fuels Association expects demand for E85 nationwide to hit an all-time high this year because more stations across the country are starting to carry it, spokesman Matt Hartwig said. It's now available at more than 2,100 stations, and much of the growth has been in states outside the ethanol-producing Midwest, such as Florida and California.

The association also expects demand to rise because the number of E85-capable vehicles on the road should keep increasing, said Robert White, director of market development for the RFA. The big three U.S. automakers have committed themselves to making half of their vehicles flex-fuel by 2012. Toyota entered the market this past year, and Ford is coming out with a flex-fuel Fusion hybrid sedan for 2010.

"I don't think there's anybody who believes gasoline prices will stay this low forever," Hartwig said.