Is ethanol finally cheaper than gasoline?

For decades, the “rack” (wholesale) price of ethanol was higher than that of regular unleaded gasoline. This was the case even during late 2005, in the aftermath of the Katrina-Rita disruption of Gulf Coast petroleum production, refining, and transport. Ethanol could compete with gasoline at the retail level because refiners get a 51-cent per gallon tax credit.

Recently, because federal and other policy incentives have created an ethanol supply glut, the price of ethanol fell sharply. Gallon for gallon, ethanol is now the cheaper fuel.

However, ethanol has about 25% less energy per volume than gasoline. Is ethanol still cheaper when the difference in energy content is taken into account? In other words, which costs more: 1 million British Thermal Units (BTUs) of gasoline or 1 million BTUs of ethanol?

According to Daily Fuel Gauge Report, an online publication of the American Automobile Association (AAA), the “BTU-adjusted” price of ethanol is higher than that of regular gasoline.

  Regular Mid Premium Diesel E85 **E85 MPG/BTU adjusted price
Current Avg. $2.765 $2.936 $3.042 $3.081 $2.241 $2.949
Yesterday Avg. $2.767 $2.939 $3.045 $3.084 $2.251 $2.962
Month Ago Avg. $2.827 $3.001 $3.111 $2.959 $2.448 $3.222
Year Ago Avg. $2.265 $2.404 $2.491 $2.624 NA NA

E-85 (motor fuel blended with 85% ethanol) costs $2.241 per gallon at the pump, compared to $2.765 for regular gasoline. However, the BTU-adjusted price of E-85 is $2.944 per gallon.

In a footnote, AAA explains the basis for this calculation:

The BTU-adjusted price of E-85 is the nationwide average price of E-85 adjusted to reflect the lower energy content as expressed in British Thermal Units – and hence miles per gallon – available in a gallon of E-85 as compared to the same volume of conventional gasoline. The BTU-adjusted price calculated by OPIS and AAA is not an actual retail average price paid by consumers. It is calculated and displayed as part of AAA’s Fuel Gauge Report because according to the Energy Information Administration E-85 delivers approximately 25 percent fewer BTUs by volume than conventional gasoline. Because ‘flexible fuel’ vehicles can operate on conventional fuel and E-85,the BTU-adjusted price of E-85 is essential to understanding the cost implications of each fuel choice for consumers.