Gas stations are adding ethanol, because it’s good for business

If you were to build a gas station today, from the ground up, you’d scribble out a list of the types of fuel you’d want to offer your customers. At the top, of course, would be regular 87-octane unleaded gasoline, which contains 10 percent ethanol. But next on the list likely would be E85 ethanol blend.

That’s right: Cheaper, cleaner-burning E85 might just be a hot seller, if you did it right. Mike Lewis, co-founder of Pearson Fuels in San Diego, has been selling it for 12 years, and he knows there’s a customer base out there for it. Last month he sold more than 34,000 gallons of E85 at his flagship station, accounting for 20.7 percent of his overall fuel sales.

map2Customers consistently buy more E85 at the station than mid-grade gas (89 octane), premium (91) or diesel combined.

“The reality is that there are flex-fuel vehicles everywhere, all over California, roughly 5 percent of the vehicles,” Lewis said. “So if you have a gas station, and you’re selling a lot of gasoline, then you can sell a lot of E85.”

Pearson supplies about 60 fueling stations with E85 and is partnering with station-retailer G&M Oil to put the fuel in 13 new stations in Southern California over the next year. The expansion is part of a national trend: Since 2007 the number of stations selling E85 has more than doubled, to about 3,000 today, roughly 2 percent of the nation’s total stations. E15 ethanol blend also is spreading across the country: Georgia got its first pumps Friday, and retailer Kum & Go added the fuel at its station in Windsor Heights, Iowa, and plans to introduce it at 60-some more over the next two years.

There are ample vehicles on the road that are ready to take the fuel: more than 17 million flex-fuel vehicles that can run on ethanol blends up to E85, including 1 million in California. And more customers are taking advantage of the many benefits of ethanol, including lower emissions and the fact that it’s made in the U.S.

Price is still the main attribute for customers, however. At the Pearson location in San Diego, the first station on the West Coast to sell E85 when it opened in 2003, E85 was priced at $2.44 a gallon earlier this week, compared with $3.55 for 87 octane. At one point, two station employees walked out with a long pole to change the 87 price to $3.65. Digits were added to the other gasoline grades accordingly.

“E85 customers are typically interested in one of two things: higher octane, because these guys have race cars,” Lewis said. “But the great majority of the customers buy it because it’s cheaper. They’re not out, frankly, to save the planet, they’re out to save a buck.”

Pearson_sign-360It can be difficult to price ethanol attractively if the price spikes or gasoline prices drop, narrowing the spread between the fuels. Unfortunately, both trends occurred late last year and early this year, as cold winter weather slowed the rail system that transports ethanol around the country, constricting supply. Meantime, the price of oil — and thus gasoline — dropped by 50 percent. It’s climbed again steadily this year.

Retailers often wipe out the normally sizable profit margin on ethanol by selling it for below wholesale. That’s what Lewis urged his retail clients to do as the least-bad option.

“But some of our retailers, if the price goes up and they happen to buy at the wrong time, they’ll say, ‘Tough, I’m making 25 cents [margin] a gallon, no matter how long it takes. So they’ll sit on that fuel for months. Whereas I would dump it [sell it for less], because if you dump it, you can go buy it for 50 cents a gallon less, and it’s just hard to get that through their heads sometimes. Some get it, and those do better.”

For retailers considering adding ethanol to their fuels menu, the equipment costs can be less than they’ve been led to believe, says Ron Lamberty, a gas-station owner who’s also a senior VP at the American Coalition for Ethanol in Sioux Falls, South Dakota. His answer is to take that tank full of unpopular fuel and put E85 or E15 in it. All steel tanks, and fiberglass tanks built since 1994, can take higher ethanol blends, he said.

“I’ve been in the business for 30 years, and I remember when [premium gas] came in, in the mid-’80s, and the oil companies were saying, ‘If you don’t carry premium, you can’t carry our brand. We’re gonna take your sign down, we’re gonna take whatever remedy we can against you with your contract, and you’re gonna have to put premium in. And so there was all that expense of adding a tank and all those other things, to sell a fuel that cars didn’t need, that cost them more.”

Pearson_customer_450

Tim Farnum, filling up his Chevy truck with E85.

At the Pearson station in San Diego, just off Interstate 15, vehicles come and go all day. Customers fill up on gasoline, E85, diesel and biodiesel. There’s an electric-vehicle charging station. There are nearly as many choices as there featured in the candy racks and beverage coolers at the store a few feet away. Lewis figures an average of 77 customers fill up on E85 each day. Tim Farnum, 47, who owns Farnum Electric with his brother, fueled up his Chevy 2500HD flex-fuel pickup. A while back they switched to the FFV trucks to save money. He figures he saves about $35 a tankful. “I only wish there were more stations around,” he said.

Lewis, like many of his customers, isn’t an environmentalist. He’s in business. And he’s selling ethanol because it makes money. E85, in fact, helped keep the station afloat before sales began to turn around about five years ago.

“I’m not out there protesting on the street, and tying myself to trees,” he said. “But I think that if you can make a business model that saves the consumer money, then you can make huge impacts by doing that. I mean, look at Tesla and what they’ve done for electric cars, look at what Toyota has done with hybrid cars. That’s what we’re doing with E85 and flex-fuel in California, and I think that you can make a massive difference if you make a business model work.”

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