Ethanol Blending Economics

As ethanol prices have become more attractive, marketers are “doing the math” and recognizing the bottom-line advantages that can be gained by adding ethanol to their product mix.

Prior to the blender pump, most retailers had been limited to buying E10 at the rack and accepting whatever price the supplier wanted to charge for the pre-blended product. In some markets, pre-blended E10 was sold at the rack as a midgrade, priced 4 to 7 cents higher than straight unleaded gasoline. Meanwhile, retailers could obtain pricing information on ethanol and unleaded, and when they blended the product prices together on paper, they found out that the pre-blended E10 prices didn’t add up.

Taking a pencil to rack prices for gasoline and ethanol and calculating the cost of E10 had many marketers fuming. In some markets, 10 to 12 cents per gallon could be saved on E10 if a marketer obtained gasoline and ethanol separately. Since a gallon of E10 contains only a tenth of a gallon of ethanol, that 10 to 12 cent markup on the finished product translates to a markup of over a dollar on the ethanol portion of the mix. There had to be a better way for station owners to share in the opportunity ethanol provides at the pump.

Enter the blender pump.

calculations-less_than_gasoline

The chart above is an example of prices obtained at various blend levels by combining unleaded gasoline and E85. Note that there are no taxes listed under the various blends, since the taxes have already been paid on the two base fuels. This fact – that these blends are merely mixtures of two other fuels that have already been taxed – is a key factor in many states’ laws. Most states allow blending of two tax-paid fuels with no additional tax payable, but there are exceptions. Check with your state, or contact us, for more details.

In this scenario, ethanol is priced lower than gasoline, and VEETC is shown with the other tax lines. The credit is currently 45 cents per gallon of ethanol, and in this instance, the E85 is true E85, containing 85/100ths of a gallon of ethanol and receiving 85% of the tax credit allowed on a gallon of blended fuel.

“The math” also works when ethanol is priced higher than gasoline. In the chart below, a scenario is shown where the ethanol price is higher than gasoline – it is clear that the blending economics still favor higher blends of ethanol.

calculations-more_than_gasoline

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