It is a renewable resource that is produced domestically rather than imported. The U. Department of Energy reports that the use of ethanol can lead to less dependence on oil and a reduction in greenhouse gases released into the atmosphere. Along with E85, other blends of ethanol and gasoline include E10 and E The number informs consumers of the percentage of ethanol contained in the blend. Regular gasoline sold in the U.
A federal mandate limits the amount of percent gasoline on the market. When drivers use E10 or E15 instead of pure gasoline, they will notice a decrease in miles per gallon. This is because compared to pure gasoline, ethanol has about one-third less energy.
A percent blend is not a flex fuel. The Renewable Fuels Association defines a flex fuel as a blend of ethanol and gasoline that contains more than 15 percent ethanol and less than 83 percent ethanol. According to Cars. They can run on anything from percent gasoline to blends containing 85 percent ethanol.
All model standard vehicles and newer can run on E15 but can't handle the corrosiveness of higher ethanol percentages. The Society of Automotive Engineers and other supporters of E85 usage argue that if automotive manufacturers would recognize and take advantage of ethanol-based fuel's superior traits, they could make an ethanol engine that was as efficient as one powered by gasoline.
According to these proponents, an ethanol engine that can reach up to 22 percent more miles per gallon than a gasoline engine already exists. It's wrong, they say, to base ethanol engine design on that of a gas engine when ethanol is closer to diesel fuel. There are more than Energy Information Administration. You might even be driving one and not realize it. When you fill up with E85, you get fewer miles per gallon because ethanol contains less energy.
So you have to fill up more frequently, which could wipe out your savings. For example, a Ford Focus gets 40 miles per gallon on the highway with gas but only 28 miles per gallon with E85, according to FuelEconomy. So filling up with gas is cheaper in this instance. When we ran the numbers for vehicles with a much smaller difference between the number of miles per gallon they got with gasoline versus E85, we found it still was cheaper to fill up with gas. Especially compared to the average cost of premium gasoline, flex fuel is cheap to fill up on.
While not every gas station provides E85, there are more popping up each year. If you live in a rural community, fuels including E85 are also creating jobs and boosting the economy near you. The Renewable Fuels Association says that in , the production of Surprisingly, the data show that E85 use in the U. This means that other factors must have been at work to offset the disincentive provided by declining D6 RIN prices.
Another factor is the discount on E85 relative to E10, which widened markedly for the month period between August and May We know that the discount is driven by three variables—the price of gasoline, the price of ethanol, and D6 RIN prices. What is not understood very well is exactly how these three factors interact in the pricing of E85 and E10, and consequently, how the price discount between E85 and E10 is determined.
The purpose of this article is to disentangle how gasoline, ethanol, and RIN prices drive the discount of E85 relative to E10 at the pump. We begin by reviewing the history of E85 prices relative to E10 prices. There has been considerable research in the agricultural economics literature on the discount that drivers in the U. At a minimum, it is sensible to think that drivers will demand a price discount large enough to offset the energy loss associated with E From a pure chemical standpoint, a gallon of ethanol has approximately two-thirds of the energy value of petroleum gasoline.
Assuming E85 consists of an average of 74 percent ethanol, the price discount on E85 relative to E10 needs to be Figure 1 plots the retail price of E85 in the Midwest as a percentage of the retail E10 price over February 8, through January 3, The red line is the breakeven E85 price as a percentage of the E10 price The figure shows that for most of the time since the relative price of E85 exceeded the breakeven energy level, and for long stretches of time by a considerable amount.
There are two notable exceptions, the first is a 6-month period in and the second is a month period from August through May The latter period is of most interest for the present analysis. About half of the August May period overlaps with the surge in E85 use from December October This suggests that E85 pricing played a role in stimulating the increase in E85 use that occurred in the last year farmdoc daily , January 24, The steep drop in CBOB prices late in brought gasoline and ethanol prices back to parity.
Therefore, we know that ethanol has been cheap relative to gasoline for most of the last year and that RIN prices have dropped precipitously. We also know that E85 contains more ethanol 74 percent on average than E10, so the price of E85 should benefit more from relatively low ethanol prices than the price of E But it is also true that the price of E85 should be more sensitive to the price of D6 RINs, which could offset the benefit from relatively cheap ethanol prices.
A model is needed to sort out the differential impacts of gasoline, ethanol, and D6 RIN prices on E85 and E10 prices at the pump, and that is what we turn to below.
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