Is E-85 Ethanol Competitive with E-0 Outside the Midwest?

AgMRC Renewable Energy & Climate Change Newsletter
September 2010

Dr. Robert WisnerBob Wisner
biofuels economist

The Energy Independence and Security Act of December 2007 (EISA)  mandates that increasing volumes of ethanol be blended in U.S. gasoline supplies from now through 2022. Total volume of starch and cellulosic renewable fuels to be blended in 2022 is at least 31 billion gallons, and possibly as much as 35 billion gallons. The total could be higher than 31 billion gallons if sizable quantities of “Advanced Biofuels” are ethanol. Advanced biofuels are those which reduce greenhouse gas emissions from the base level by at least 50 percent. While it is not known for certain whether technology might permit the commercialization of non-ethanol biofuels at some future time, ethanol currently appears likely to be the main candidate for filling these mandates. Ranges indicated here for 2022 would be equivalent to about ¼ of the nation’s recent gasoline use.

Without a break-through in automotive technology, E-85 (a blend of 85% ethanol and 15% gasoline) will need to be priced approximately 28% lower than gasoline (E-0) to compensate consumers for the sharply lower fuel mileage of E-0\-85 . E-85 also is the main alternative for breaking through the blending wall if higher intermediate blends than E-10 are not approved by EPA for conventional vehicles. E-85 is approved only for flex-fuel vehicles and at this time they represent only a small fraction of the total U.S. vehicle fleet. However, their numbers will increase in future years with the recent shift in emphasis of automobile manufacturers to increased production of flex-fuel cars and light trucks. The number of retail fuel stations offering E-85 also is quite limited but will likely increase in the next several years as more flex-fuel vehicles are put on the nation’s highways.

In this article, we look at recent geographic variations in the relationship of E-85 prices to E-0 across the U.S. In an article last month (, we noted that E-85 had become competitive with E-0 this spring in Iowa and some other Midwestern states. In this article, we conclude that E-85 is much less competitive with E-0 outside the Midwestern states (where most of the fuel ethanol is produced). This should not be surprising, given the higher cost of shipping ethanol long distances vs. the low pipeline shipping costs for gasoline. There are, however, a few exceptions where close proximity to refiners and/or individual state tax policies and clean air regulations may affect the price differential.

Limited competitiveness of E-85 outside the Midwest does not bode well for attainment of the EISA mandates. The 36 billion gallon renewable fuels mandate for 2022 will require a greatly enlarged ethanol market, and low prices will be needed to expand the E-85 market. That in turn may limit the opportunity for profitable production of Midwest starch and cellulosic ethanol, barring changes in engine designs to increase E-85 miles per gallon of low-cost ethanol transport technology. Low retail prices for ethanol to make it competitive and expand the market size would tend to translate into reduced profitability for ethanol producers. This is of special concern to investors in cellulosic ethanol, which is generally expected to have a higher production cost than corn starch ethanol . In some cases, the cost of shipping ethanol long distances may lead cellulosic ethanol investors to consider locating plants closer to large densely populated regions and seeking to develop local supplies of feedstocks produced in the eastern U.S.

Needed price discount for E-85 to make it competitive with 100% gasoline

On an equivalent volume basis, ethanol has about 66% the energy content of gasoline (34% less energy). While some analysts indicate ethanol’s higher octane level may offset some of the energy content disadvantage, EPA studies show that on average, about a 29% lower price for E-85 than for E-0 is needed to compensate for its lower mileage per gallon . This is computed by multiplying the 34% less energy by the 85% of the gallon that is composed of ethanol (34% times 85% equals 28.9%. Therefore, E-85 needs a price equal to 71% the value of E-0 or lower (100% - 29% = 71%). If E-0 is selling for $2.50, E-85 needs to sell for $1.78 or less ($2.50 x 71% = $1.78).

Actual mileage differentials will vary some by vehicle brand and model. For comparison of the competitiveness of E-85 with E-0 (100% gasoline), we use a 29% lower price than gasoline as the standard for assessing competitiveness. For some consumers who 1) don’t check mileage closely, 2) prefer to use more renewable energy, or 3) have vehicles with the lower end of the EPA mileage-reduction range, a slightly more modest price differential may cause them to shift to E-85.

Source of retail E-85 price data

Current and historical E-85 retail prices are available by selected cities and towns in individual states from the web site, . This is our source of price information. At the time of this writing, the site reports E-85 prices in 34 of the 50 U.S. states and in more than 1,575 cities. In this analysis, we look at two different time periods, May 2010 and May 2009. Over this time period, wholesale or rack prices have declined sharply relative to gasoline. Major reasons for this are (1) resumption of ethanol production at plants formerly idled by bankruptcy, (2) start-up of production at a number of new corn starch ethanol plants, and (3) the approach of the industry-wide blending wall that stems from EPA’s maximum allowable fuel blend of E-10 for non-flex-fuel gasoline-powered vehicles. As we noted last month, a portion of the lower wholesale ethanol prices and/or the blenders’ tax credit is being passed back to consumers in the Midwest in the form of lower retail prices for ethanol blends.

If we use a 23% lower price for E-85 than for E-0 (77% the price of E-0) as a price level that flex-fuel vehicle owners would begin to try E-85, only five states at this writing have an average differential this large or larger. Those states are Iowa, South Dakota, Nebraska, Wisconsin, New York, and Louisiana. However, a few stations in some other states had low enough E-85 prices to attract motorists’ attention in their very limited trade areas.

Specific price comparisons for selected states

Figure 1 shows a map with average E-85 to E-0 price differentials for June 2010 by states. In all cases the differential indicates E-85 prices are equal to or lower than E-0. However, there is a wide variation in the differentials across the U.S., ranging from 28.7% lower average prices for E-85 than for gasoline in Iowa. Iowa is the leading ethanol producing state, with a large surplus of ethanol that moves to out-of-state markets. To create an incentive for out-of-state movements, its wholesale ethanol prices tend to be lower than in many other states. State incentives for retail gasoline stations also help to account for Iowa’s larger discount of E-85 prices to gasoline prices. Iowa reported 71% of its E-85 stations had E-85 price discounts to E-0 of 28% or more. New York had 3 such stations. In Iowa, E-85 relative to gasoline ranged from 19% to 35% lower than E-85, with many stations having prices of 32% to 33% lower than E-0. Nebraska price differentials ranged from 16% to 31%.

Minnesota, a unique case

In Minnesota, price differentials ranged from 12% to 29%, with many in the 26% to 27% range. However, its comparisons are with the state-mandated E-10 ethanol/gasoline blend, since E-0 is only available in limited amounts for vintage vehicles and off-road equipment. The state requires that almost all gasoline sold in Minnesota must be a blend of 10% ethanol and 90% gasoline, with the exceptions noted above and E-85. Based on the energy content differential of E-10 vs. E-85, an energy-equivalent E-85 price would be about 25% to 26% below E-10 gasoline blends. While its state average discount may not be low enough to fully adjust for average mileage differentials, it probably is large enough to get the attention of a significant number of flex-fuel vehicle motorists. Also, many of its E-85 stations recently have had a large enough differential to make it competitive with E-10.

Similarly, California has mandated a 10% ethanol blend in gasoline. Thus, for E-85 to be fully competitive with the alternative E-10 fuel in that state, the price differential would also need to be about 25% to 26%. California’s average E-85 price differential vs. gasoline was reported to be 19.8% in early July, for its relatively small number of E-85 stations. From this price comparison, we conclude that a few major ethanol-producing states in the upper Midwest as well as New York recently have had low enough E-85 prices to attract flex-fuel motorists’ attention. A sizable percentage of stations have had E-85 prices low enough to make this product competitive with E-0 in these states. Thus, an E-85 fuel market is beginning to emerge in a small fraction of the U.S., although a much larger market is needed if mandates of EISA are to be reached in the years ahead.

Number of E-85 stations by state 

Number of E-85 stations by state

While price differentials are one important facet of an emerging E-85 market, another very important aspect is availability of E-85 stations for motorists with flex-fuel vehicles. The number of E-85 stations varies widely from one state to another. It has been influenced by whether individual states provide tax credits or other incentives for retailers to invest in additional tanks and pumps that are needed for E-85. With a small initial E-85 market, state incentives can help fuel retailers recoup the added investments required for such stations.

Figure 2 shows the number of E-85 stations reported by state in early July 2010. The total number of stations offering E-85 has been gradually increasing, but still remains small in comparison with the total number of retail gasoline stations. In general, the populous states on the east and west coasts and parts of the South (which naturally are heavy users of gasoline) have much fewer E-85 stations per capita than in the heart of the Midwest ethanol-producing belt. For example, Virginia has only three E-85 stations, despite encompassing a part of the Washington, D.C. metropolitan area. New England reports no E-85 stations, and that includes populous areas adjacent to New York City and New Jersey.

Number of E85 retail statoins and number of cities with e-85 

On the west coast, the heavily populated state of California reports only 47 E-85 stations. Its neighbors to the north, Oregon and Washington, report twelve and six E-85 stations, respectively. Arizona reports 32 such stations.


The E-85 market is in the early stages of development. For the future, if ethanol is to have the fuel-supply role envisioned by Congress and the ethanol industry, a large national expansion of the number of E-85 stations and the number of flex-fuel vehicles will be required. To expand this market in a way implied by mandates in the 2007 U.S. energy legislation, technology will need to be developed to produce ethanol at a cost that prices E-85 at a competitive price to E-0. To make this possible, priority areas for research will include (1) efforts to improve E-85 vehicle fuel mileage, (2) technology to continually improve the efficiency of corn starch ethanol plants, (3) a break-through in low-cost technology to convert cellulose to ethanol, (4) technology that will allow low-cost production, harvesting, handling, storage, and pre-processing of normally very bulky cellulose feedstocks, and (5) technology and investments to reduce the cost of shipping ethanol to distant markets .

The Midwest, where most of the ethanol is produced, has by far the largest number of retail E-85 market outlets and the most competitive pricing of E-85. This region likely will continue to be the most important market for E-85 for some time to come. However, for the industry to develop to the level envisioned by policy markers, the current very limited market for E-85 in heavily populated areas along the east, west and southern coasts of the U.S. will need to be greatly expanded.

Because of the long distance from the major Midwest ethanol producing region to the east and west coasts, high ethanol transportation costs will make enlargement of the E-85 market in these coastal regions difficult. If a break-through in developing low-cost cellulosic ethanol occurs, investors may consider constructing a substantial number of cellulosic ethanol plants adjacent to more populous areas of the nation.