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Volumetric ethanol pricing and octane value
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Pricing by volume
Fact: Ethanol tends to sell at the same price per gallon as gasoline
(Rack price of ethanol) – (subsidy-per-gallon) = rack price of gasoline
Deviations from this pricing rule come from two sources,
(1) short-term changes in demand caused by regulations, and
(2) ethanol's intrinsic advantages and disadvantages relative to gasoline.
Number 2 is discussed below. Number 1 just makes it hard to see what's happening on average.
E85 can be hard to sell, because people notice the drop in their miles per gallon. So if it's priced the same as gasoline, it's a bad deal. Now E85 must compete with other uses of ethanol where its low mileage is not noticed, but if E85 became the main way ethanol is sold, it would begin to compete on an energy basis and its price would fall.
What is the evidence for volume-based pricing?
1. Common sense. (a) Often it's in all available gasoline, so drivers cannot switch away from ethanol because of its low energy. (b) Often drivers do not know it's in the gas, so they will certainly pay the same. (c) Most drivers do not know it has less energy, so they have no reason to pay less.
2. Twenty-five years of ethanol prices. The USDA reports that from 1982--2006, the rack price of ethanol averaged 57¢ above gasoline. Subtracting the 54¢ credit over that period leaves only a 3¢/gallon premium. Given all the price fluctuations from changes in regulations, this is not a significant difference.
3. Argonne Labs (2000) reports on ethanol pricing as follows:
The ethanol octane blend market in the Midwest has traditionally been priced at the rack price of unleaded plus $0.54/gal (the value of the federal motor fuels excise tax credit). [This] is the traditional pricing mechanism and the one currently used. more
Apparently, the market will not accept ethanol without about a 5¢ discount, unless it values it for as an octane enhancers as well as a volume extender. The basic pricing rule is price the same per gallon as gas. The only deviations noted are due to some intrinsic properties of ethanol other than energy.
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http://zfacts.com/p/817.html | 01/18/12 07:27 GMT
Modified: Tue, 05 Feb 2008 19:51:35 GMT
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