Quote:
Originally Posted by TORRED1
Im glad that the alternative fuels option continues to expand, have a question for you though, HR, Ive noticed that the price of E85 keeps pace with the price of gas, this does not make sense to me. If the price of a barrel of oil goes up and their for gas say from 3.15 to 3.35 and E85 was 2.75 it is now 2.95, it allways seems to keep that 30 to 35 cent distance from regular. would one be correct in thinking that the price of ethanol would be stable, if E85 was selling for 2.25 then shouldn't it be only 1.5 cent higher for every 10 cent price price in gas. so if gas has gone up 50 cent then E85 should have gone up 7.5 cent maye be 10 cent. sounds logical to me, tell me where im wrong.
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Imagine you are a refiner. Let us say it costs you $3.00 to buy oil and refine it into a gallon of gasoline. You then sell it to the local gas station for $3.30. The gas station then sells it to you for $3.50.
Now the local ethanol producer goes to the refiner and says "rather than spend $3.00 a gallon refining oil, why not buy my ethanol for $2.90 a gallon and mix it in. That will save you 10 cents per gallon, which means you can lower your price by 5 cents in order to undercut your competition, and still come out ahead 5 cents a gallon." Needless to say, the refiner does it.
Now the price of oil goes up. As a result, it now costs the refiner $3.20 to refine a gallon of gasoline. Guess what the ethanol producer is going to do: raise his price from $2.90 to $3.10. The refiner still will happily pay the higher price because he still comes out ahead 5 cents per gallon.
This will continue until there is a glut of ethanol. At that time, ethanol producers will have to compete among themselves for business by lowering their prices. What will happen is that the price of ethanol will drop low enough to create new demand for E85. But right now there is a shortage of ethanol, so all ethanol producers need to do is keep their price a little below the refiner's cost of producing gasoline.