E15 Ethanol Blend Expected To Be Lowest Cost Fuel In Iowa

E15 Ethanol Blend Expected To Be Lowest Cost Fuel In Iowa

Fuel changes this fall by Iowa's largest pipeline operator will dramatically impact gasoline prices.

Iowans who insist on buying gasoline without ethanol could soon be paying dramatically higher prices. Magellan Midstream Partners, a firm based in Tulsa, Okla. which operates the largest pipeline company in Iowa, has notified customers it will no longer ship "clear" 87 octane regular gasoline to Iowa terminals, effective September 15.

NON-ETHANOL GAS FACES PRICE JUMP: Gasoline that doesn't contain ethanol will cost considerably more this fall in Iowa.

Instead, the pipeline operator will begin transporting 84 octane fuel that can be blended with more expensive 91 octane fuel to produce regular 87 octane gasoline, which is the minimum octane content that can be legally sold in Iowa. The bad news for motorists is that the new 87 regular octane fuel without ethanol will likely cost more, perhaps a lot more, at the pump. The price for 91 octane premium gas without ethanol could also jump significantly higher.

The cost for ethanol-blended gas, which is purchased by 82% of Iowa motorists, is expected to remain about the same, says Monte Shaw, executive director of the Iowa Renewable Fuels Association. IRFA recently released results of a study showing how these fall fuel changes will impact prices. The E15 ethanol blend is expected to be the lowest cost registered fuel in Iowa. "Many gasoline retailers will have to choose between offering low-priced E15 and much higher priced unblended gasoline," says Shaw.

Retailers will choose offering low priced E15 and much higher priced unblended gasoline
IRFA, which commissioned the study by Decision Innovation Solutions of Urbandale, Iowa, sees Magellan's switch as a potential boost for ethanol. Shaw is urging Iowa gasoline retailers to consider selling 89 octane E15 gasoline, which is 15% ethanol, in addition to E10 which is already widely sold.

Shaw believes E15 gas could sell for about 5 cents per gallon less than E10 gas and would be good as a second option for gas stations with just two tanks. E15 is approved only for use in 2001 model year and later vehicles. "Getting to this next level of ethanol blend would create a bigger use for corn and help the ag economy," Shaw says.

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Only a tiny amount of E15 is now being sold in Iowa. "But if the ethanol-blended fuel were sold on a widespread basis in this state, it could be used as a model for the rest of the nation," says Shaw. Other parts of the U.S. have already made the change from 87 octane to lower octane gasoline and he expects other Iowa pipeline operators to follow Magellan's lead.

Iowa gasoline retailers aren't sure yet how the upcoming changes will affect gasoline prices
Dawn Carlson, president of Petroleum Marketers and Convenience Stores of Iowa, represents 2,000 Iowa retail locations that sell gas. "It's anybody's guess what will happen with gas prices as a result of the pipeline company's switch to shipping the lower octane gasoline into Iowa," says Carlson. "It will probably take a while for consumers to sort out what product they want."

The study released by IRFA July 29 shows the pending shift in fuels carried in pipelines to Iowa will likely increase the cost of non-ethanol blended gasoline. That will likely force fuel retailers to choose between offering a relatively high priced traditional E0 (100% gasoline) and a lower-cost E15 (blend of 15% ethanol and 85% gasoline). The net wholesale price difference between the two options could range from 34 cents per gallon to 57 cents per gallon. The study, commissioned by IRFA, was conducted by Decision Innovation Solutions of Urbandale, Iowa.

"With the price of 87-octane E0 expected to spike, retailers will need to think hard about what fuel will attract more customers," says Shaw. "Each retailer will need to decide for themselves, and the right answer may not be the same for all, but we're confident that E15 will look very attractive once the marketplace implications of the oil refiners' pipeline changes are better understood."

E10 ethanol could cost 30 to 52 cents a gallon less
Starting in mid-September, regular 87-octane E0 will no longer be shipped through the pipeline systems that serve Iowa. Oil refiners will replace this product with 84-suboctane gasoline, which cannot legally be sold to the public. Boosting the fuel back to the minimum required 87-octane will necessitate blending with ethanol or with 91-octane premium gasoline. The study found that: "prices for 84 clear and 91 clear will be impacted by the decision to offer a mixed 87 clear product."

"Historically at the wholesale level, regular 87-octane E0 has been priced at about 6 cents more than 89-octane E10, a fuel containing 10% ethanol," says Shaw.  "With these pipeline changes, we could see the E10 discount grow to 30 to 52 cents per gallon, while E15 could cost 34 to 57 cents per gallon less than E0."

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The study outlined several scenarios based on projected demand for premium gasoline which resulted in varying wholesale price spreads between E10, E15 and regular 87-octane clear (as shown in the table below). In the low premium gasoline demand scenario, regular 87-octane E0 is 34 cents per gallon more than E15. In the high premium gasoline demand scenario, regular 87-octane E0 is 57 cents per gallon more than E15.

Wholesale

Current Actuals

Projected Price Difference from E10

 

2012 Q3 Avg.

Price Difference from E10

Low Premium Gasoline Demand Scenario

High Premium Gasoline Demand Scenario

E10

$3.01

-

-

-

Regular (87 clear)

$3.07

$0.06

$0.30

$0.52

E15

$3.00

(-$0.04)*

(-$0.04)*

(-$0.05)*

E15 Cost Savings vs. Regular clear

 

$0.10

$0.34

$0.57

 

*Includes 3-cent-per-gallon refundable state retailer tax credit.

"At the end of the day, nearly every retailer in Iowa will continue to offer E10 with the only change being that it will have an 87, not 89, octane rating," says Shaw. "The question is: how many retailers will continue to offer E0 in their second tank despite the looming price spike and how many will consider offering lower-cost E15 instead?  IRFA is not saying the answer is the same for every retailer, just that this shift in pipeline fuels will have serious implications on the future price of fuels offered in Iowa. We urge retailers to consider how these price implications impact their ability to draw consumers to their station. Those interested in learning more about E15 or in talking with a fellow retailer who already offers E15 should contact the IRFA."

IRFA offers assistance to fuel retailers who are investigating the option of offering E15 as a registered fuel at their gas stations. Interested retailers should contact IRFA's Lucy Norton at 515-252-6249.

Iowa is the leader in renewable fuels production. Iowa has 41 ethanol refineries capable of producing over 3.7 billion gallons annually, with one wet mill and two cellulosic ethanol facilities currently under construction. In addition, Iowa has 12 biodiesel facilities with capacity to produce nearly 315 million gallons annually. The Iowa Renewable Fuels Association was formed in 2002 to represent the state's liquid renewable fuels industry. The trade group fosters the development and growth of the renewable fuels industry in Iowa through education, promotion, legislation and infrastructure development.

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