2 October 2007

Ethanol Boom Slowing Down

Ethanol has often been in the news for the past year or two as a much-hyped alternative to gasoline for fueling our motor vehicle fleet. Ethanol's supporters point out that E85 fuel (85% ethanol/15% gasoline) reduces US dependence on imported petroleum, burns more cleanly, and can actually increase vehicle performance. Opponents of ethanol point out that production - which comes mostly from corn in the US - takes food from the global food supply, requires almost as much energy to produce as the finished product provides, and reduces fuel economy. Also, only a small percentage of the service stations in the US have E85 pumps, making it difficult to find in most regions even for folks interested in using the fuel in their flex fuel-capable vehicle. For more information on the E85 experience in daily life, refer to The E85 Road Test, published here in June 2007.

Along with a big marketing push from GM and the US government in support of E85, in many parts of the country, ethanol was blended with gasoline to create E10 (10% ethanol/90% gasoline) as a clean air alternative to the old gasoline/MTBE blend that was found to contaminate ground water and outlawed in the past year. Excitement and hype about corn-based ethanol compelled US farmers to plant more acres of corn for the 2007 growing season than at any time since World War II. And, why wouldn't they? Corn prices are through the roof, and it can be a very profitable crop at current prices.

Until yesterday, when the Wall Street Journal wrote about falling ethanol prices, I had no idea that ethanol prices had dropped so much. They are down over 30% over the past few weeks alone. While availability of the fuel continues to be a problem, the low price certainly makes it an even more compelling alternative to gasoline. Heck, as long as ethanol was, say, less than $2 per gallon, and regular gas is over $2.50, it's almost cheaper to use than gasoline (considering the approximate 25% fuel economy penalty that ethanol has compared to gasoline). According to the article, the price of ethanol has dropped to about $1.50 per gallon, from over $2.50 per gallon a year ago.

I'd certainly use it, and the energy security (i.e. no imported oil) aspects of E85 make it even more appealing. For the equation to calculate the breakeven price of using E85, refer to the link above for the E85 Road Test article.

My guess is this is just a supply and demand imbalance. When ethanol was added to most gasoline instead of MTBE, plus all the hype and hoopla over E85 from GM and others, everyone wanted a piece of the action. Now that things are coming back down to earth, all the farmers who planted record amounts of corn, and all the refineries who went online in an attempt to capture the boom, have created more supply than there is demand for, at least in the current environment.

If you drive a flex fuel-capable vehicle, and you're interested in saving money on your fuel bill, you might want to check out http://www.e85refueling.com/ to see if there is an E85 station near you. Happy motoring!

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