According to a new study commissioned by the Iowa Renewable Fuels Association (IRFA), a pending shift in the fuels carried in pipeline to Iowa will likely increase the cost of non-ethanol blended gasoline forcing retailers to choose between offering a relatively high priced traditional E0 (100 percent gasoline) and a lower-cost E15 (a blend of 15 percent ethanol and 85 percent gasoline). The study finds the net wholesale price difference between the two options could range from 34 cents per gallon to 57 cents per gallon. The study was conducted by Decision Innovation Solutions of Urbandale.
“With the price of 87-octane E0 expected to spike, retailers will need to think hard about what fuel will attract more customers,” said IRFA Executive Director Monte 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.”
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.”
“According to the study, 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 percent ethanol,” said 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.”
The analysis 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.
“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,” added 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.” Shaw concluded, “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.”