Ethanol prices are low enough to give farmer investors in new plants heartburn. But they're also having once undreamed-of results in the marketplace. US ethanol is so cheap that it competes with Brazilian ethanol on the export market. Some gasoline retailers are blending more of it into gasoline without government mandates. And consumer groups are clamoring for more of it.

In Nebraska, Fred Bosselman, Jr. has seen fuel sales at least triple at pumps his company has switched from premium gasoline to E-85, a blend of 85% ethanol and 15% gasoline. Bosselman's family owns a chain of truck stops under that name as well as a chain of Pump and Pantry convenience stores. Three Pump and Pantry stores, in Grand Island, Hastings and Kearney, have switched to an E-85 pump.

The Pump and Pantry in Grand Island, one of 38 in the Nebraska convenience store chain, sold about 150 gallons of premium a day at the pump it recently switched to E-85, Bosselman told Agriculture Online. Sales jumped in the first month with the new fuel. "There's days when it was doing 700 gallons and days when it was doing 400. I don't have an exact average, but it was three or four times what premium was doing."

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The main reason for this boomlet in ethanol sales is price. The E-85 was selling for $1.59 a gallon when regular unleaded sold for $1.99. And most of the unleaded Bosselman's convenience stores and truck stops sells is also a blend of gasoline with 10% ethanol, or E-10.

"Our experience for 25 years with E-10 is that price is important. Most consumers are buying the best price at the pump," Bosselman says.

Thanks to a combination of federal and state tax credits and market forces that have created a temporary oversupply of ethanol (and, critics of the oil industry say, lack of market forces, too) the wholesale spot price for ethanol is currently about $1.20 a gallon when gasoline is about $1.50.

US ethanol is so cheap that it is now competing with Brazilian ethanol on the international market, says Monte Shaw of the Renewable Fuels Association, a lobbying group that represents the industry. Tankers of American ethanol have reportedly been shipped by major US producers to India and the European Union. Cargill declined to comment on reports that it is one of the companies now exporting ethanol.

And, Shaw points out, this year the US is not importing from Brazil. Last year we imported about 150 million gallons, when US production was about 3.4 billion gallons.

"I think it's fair to say that with the price differential are large as it is between ethanol and gasoline, it should attract attention," Shaw told Agriculture Online.

Price differential could lead to more blending

That price differential is also leading some independent gasoline retailers who haven't blended ethanol to start, and in states that don't mandate ethanol use, said Steve Bleyl, CEO of the Renwable Products Marketing Group, a producer-owned LLC that ships ethanol for some 14 farmer-owned plants.

"I think there's people who are going to start blending in Atlanta because it makes economic sense to blend it, not because it's mandated," Bleyl said.

Many in the ethanol industry expected Atlanta to be the next major market for the fuel. The EPA had moved to require 13 counties in the region to use reformulated gasoline starting this year to meet Clean Air Act requirements. The industry was preparing to blend ethanol but the state of Georgia has sued the EPA to block the switch.

For independents to be able to switch on their own to selling gasoline with ethanol, they'll need to be able to buy a special grade of gasoline, reformulated blendstock, from major oil companies, Bleyl said. That will be a test of how competitive the market it is.

Bleyl isn't among those who see conspiracies among the oil companies to prevent ethanol blending. But the industry is drawing criticism from consumer groups and members of Congress.

Recently a report by the Consumer Federation of America estimated that consumers could save as much as eight cents per gallon if major oil companies, not just independents, began to blend more ethanol.

CFA released the report, "Over a Barrel: Why Aren't Oil Companies Using Ethanol to Lower Gasoline Prices?" earlier this month. The answer, it said, is due to the increasing concentration and market power of the oil companies. "The market is not competitive enough to force them to worry about price increases," the report concludes. "They also do not own the ethanol. They prefer to process more crude oil and make more money keeping the price up."

Rayola Dougher, a spokeswoman for the American Petroleum Institute, said the oil industry is already using a lot of ethanol and that basing marketing decisions on a short-term difference between gasoline and ethanol spot prices "isn't always feasible or desirable."

"Really, a long lead time is required to blend ethanol," she added. "This is something you really have to gear up for."

If the spread between ethanol and gasoline prices remains, she expects to see more oil companies blending the two fuels. "People are always trying to make money and, boy, if it stayed like that, I couldn't imagine it not being used."

Shaw at the Renewable Fuels Association doesn't believe that the cost of switching is the main reason more oil companies don't blend ethanol with gasoline. With the 51 cents a gallon tax credit that oil companies get for blending ethanol, the real difference in price between the two fuels is closer to 70 cents a gallon.

"At a 70-cent discount, for a product going through your terminal, you'll make that up pretty quick," he said. The current situation shows the need for a national renewable fuels standard that would eventually require the nation to us 8 billion gallons of ethanol and other renewables, he added. (The American Petroleum Institute supports the 5 billion gallon RFS already passed in the House of Representatives version of an energy bill.)

Some members of Congress aren't waiting for the allegedly impure market forces to act. Senators Tom Harkin of Iowa and Evan Bayh of Indiana, both Democrats, have written Energy Secretary Samuiel Bodman asking for an investigation.

"Blending more ethanol into our fuel supply could lower these costs immediately," Harkin said. "Yet oil companies refuse to budge. Americans deserve to know why oil companies making record profits insist that families pay top dollar at the pump when prices could be reduced by blending more lower-priced ethanol into our fuel supply. I intend to find out."

The Senate is also trying to get a boost for E-85 added to a federal highway bill. It would provide for tax incentives to help cover the cost of adding E-85 pumps like those at the Bosselman family's gas stations. And it would require car companies to inform new car and truck buyers if they have purchased a vehicle that can burn E-85.

In spite of the controversy over the price spread between ethanol and gasoline, the industry shows few signs of slowing its expansion. At least a slow down hasn't shown up at GE Rail Services, one of the top three companies in the U.S. that leases rail tank cars to ethanol plants for shipping the fuel.

"This year alone there are probably between 300 and 500 new cars that we're building that will go into the ethanol industry," said Ken Wickman, vice president and business segment leader for the company"s petrochemical and business plastics unit. Even though he's heard discussion in the industry about fears of overexpansion, "it seems to be building at the same pace," he said.

"The fact that banks and others are investing in these plants is an indication they see that as a long-term opportunity," he added.

At the Renewable Fuels Marketing Group, Steve Bleyl sees similar signs that the ethanol industry's slump could be short-lived. Bleyl, who once worked in the oil industry, doubts that gasoline prices will continue falling during this summer's vacation driving season. "The best thing for ethanol would be high-priced gasoline."

"Ethanol is now a commodity trading on the fundamentals of supply and demand," he said. "At these levels, will demand increase? It will just take time."

"We're not in that much of a glut, either," he said of the current ethanol supply. "A lot of it is being worked off."

The Senate Energy and Natural Resources Committee will begin marking up comprehensive energy legislation Tuesday.