Cost of E85 Fuel is Higher Than Gasoline

The heavily promoted alcohol fuel called E85 might cut America's oil use and help support U.S. agriculture, but it's not reducing motorists' fuel bills. It's boosting them significantly.

The price of E85 -- a fuel that's 85% ethanol made from grain and 15% conventional gasoline -- is higher than that of gasoline, even though E85 has only 72% as much energy. The U.S. Department of Energy says a vehicle has to use 1.4 times as much E85 as gasoline to go the same distance.

At some Nebraska stations, E85 was $2.19 a gallon Tuesday, while gasoline with 10% ethanol -- a common substitute for unleaded regular in the Midwest -- was $2.06. "This doesn't make sense," says Wayne Davis, a division manager at fuel company Bosselman, based in Grand Island, Neb. "Our customers are saying, 'I'm not going to buy E85, which is better for the environment and the economy, unless it's cheaper.' We're seeing E85 just sit." Related: EPA rules won't curtail ethanol demand.

President Bush, in his State of the Union speech Jan. 31, promoted ethanol as a way to help reduce Middle East oil imports 75% by 2025.

Ford Motor and General Motors are working with fuel companies to boost the number of E85 stations in the Midwest. The two automakers say they will build about 600,000 vehicles this year with the special equipment needed to use E85. About 5 million already are on the road. All that emphasis could be negated by pricing.

"Price dictates demand. Period," says Dave Lybarger, who sells E85 at one of his two Petro Plus stations in Garnett, Kan.

He was selling E85 for $1.94 a gallon Tuesday, and conventional gasoline for $2.19. "If you get it 40 cents under, you start attracting new business. If you get to just 10 under, you start to lose some (E85) business," he says.

Nationwide average price for gasoline has sunk to $2.286 per gallon, according to travel group AAA's daily report.

To be an even-up energy value, E85 would have to sell for 72% of that, $1.646.

But E85 wholesale prices have jumped to more than $2, so retailers can't afford to sell it for that.

The price of ethanol has been driven up because major oil refiners are suddenly buying in bulk. They're stocking up on ethanol as a replacement for MTBE, a petroleum-based additive suspected of causing cancer. MTBE and ethanol boost the octane of gasoline and can reduce pollution.

MTBE isn't officially banned, but oil companies are switching to avoid lawsuits.

"Gasoline with MTBE in it will become like gasoline with anthrax in it within the next 90 days," predicts Tom Kloza, veteran analyst at the Oil Price Information Service.