By Joe Petrowski
Frank Sinatra once said “Alcohol may be man’s worst enemy but the Bible tells us to love our enemies!”
Fuel retailers have had a love/hate relationship with ethanol with high prices and shortages in the beginning of its use, to infrastructure costs that the retailer had to bear, to a plethora of new regulations.
Politically in a nation that can and will disagree on most everything coastal states thought ethanol was nothing more than a boondoggle for Midwestern states at the expense of the coasts, and driven by large political agri-business contributors Like ADM and Cargill. But it may be time for smart fuel marketers to investigate embracing higher blends.
Ethanol is now (mid-February, 2018) 80 cents/gallon cheaper than RBOB gasoline meaning every 5% blend increase drops the finished price 4 cents/gallon with E-85 showing a 60 cent discount to generic E10. In a world where there are customers who will jump a curb for 5 cents/gallon this is simply too resisting for most retailers and their customers.
The US ethanol annual supply and demand looks as follows:
- Production 19 billion gallons per year (and increasing)
- Imports 0.5 billion gallons/year (but declining as domestic prices collapse)
- Total supply 19.5 billion gallons per year
- Usage in gasoline blending 17 billion gallons
- Ending stocks 2.5 billion (54 days of usage high by any commodity measurement)
There are now 250,000 flex fuel vehicles in the United States and while the largest number are in California there are several states with an excess of 3,000 flex fuel vehicles including Iowa, Nebraska, Oklahoma, Texas and Kansas (as would be expected).
By attracting flex fuel vehicles a retailer can expect an incremental 55 trips to the fuel island and 35 trips inside generating $192/year per trip, or $11,000/year incrementally and when considering a new tank and blending system will cost $20,000 and generates a payback under 2 years. Whether it makes sense for any particular site of course will depend on the number of flex fuel vehicles in your market area and the number of flex fuel competitors which is available from the EIA, Renewable Fuels Association and DOT.
It appears ethanol is with us for the foreseeable future and retailers only fear of embracing this is another old alcohol joke: “When alcohol is cheaper than gasoline, drink whiskey and walk.”
Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October 2008, he was named CEO of the now combined Gulf Oil and Cumberland Farms, whose annual revenues exceed $11 billion and who now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is now the Managing Director of Mercantor Partners, a private equity firm investing in convenience and energy distribution. Joe is also a member of the Gulf, Green Print LLC and Yesway where he also serves as leadership advisor and director of fuels.