Saturday, July 08, 2006

Ethanol Pricing - What do Consumers Want?

I have noticed over the past couple of weeks that the price of ethanol blended gasoline has been inching up relative to regular unleaded gasoline. Ethanol blends (i.e., those with 10 percent ethanol, not E-85) have traditionally been priced a few cents lower than the regular unleaded. That made sense from the seller's perspective, since ethanol traditionally costs less than gasoline to make. It also made sense from a consumer's perspective because there is a small mileage detriment (about 3 percent less) associated with an ethanol blend. Even though the octane rating is higher, the ethanol product will not take you as far as the unleaded gasoline.

Note: I discussed this mileage topic in a previous post on E-85, which can be found here

What has caused the gap to close? One possibility is that ethanol companies are now becoming infected with soul-less executives from "big oil". The "Borg" have assimilated them and they are now fully into oppressing consumers.

Another possibility, for those who aren't on drugs (or who aren't influenced by a steady diet of Air America and Start Trek), is rooted in the demand for ethanol. The following link will take you to a chart that shows the price of ethanol in various locations.

As you will see, the price of ethanol only about a year ago was down in the low $1.20s, while it is now over $3.00. What's up with that? As a corn producer (farmer) and consumer (cattleman), I can assure you that the price of corn has not tripled. But what has changed is a growing demand chasing too few gallons of the stuff. Some of this comes from environmental regulations, which caused a shift from MTBE (a synthetic gas oxidizer) to Ethanol in states like California. Other growth comes from state laws, which may require gas stations to carry Ethanol blends in their tanks. And other growth may come from consumer demand.

Given the mileage detriment, consumers choosing to buy ethanol for as much or more than the price of regular unleaded gasoline must be doing so for reasons other than driving economy. Some may buy it out of habit; they like how their vehicle runs on this blend and it works for them. They may also not think about the mileage difference, or if they do they just aren't that price sensitive.

Some may also buy out of a desire to support the farm economy and as a means of sending a message of supporting domestic over foreign energy supplies.

Still others may think that this is just what the voices are telling them to do. Be careful around such people.

The situation is not likely to persist for long, as more ethanol plants are coming online. There is a futures market for ethanol, and based on the recent quotes for out-months, the price is expected to drop considerably back into the $2.40 level within the next several months.

Note that this occurs despite the fact that corn has an upward sloping price curve based on storage costs associated with the future months, as well as crop predictions for the fall. Thus, markets will fix this problem, but it may take time. And it may take time for consumers to sort out what it is they want and why.

Happy Saturday.


Anonymous said...

Are there really people out there who believe that ethanol pricing is the result of an infection by "soul-less executives from 'big oil'"? It seems pretty clear to my non-economics mind that as the price of gasoline rises, people will turn to the limited supply of ethanol, thereby putting upward pressure on the price. Easy enough.

So why create that straw-man? So you can lob unnecessary high school-like insults at it? (On drugs, steady diet of Air America, etc.) Your commentary would have been much better without that nasty little detour.

Ed Morse said...

Sorry, anonymous. You may be right. Also, a person on drugs might be offended in being called an Air America listener. Next time I'll be more careful in my attempts at humor. Thanks for your comments.