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It's easy to understand why, as the Ukraine war disrupts global oil markets, gasoline prices are rising. What puzzles me is that E85, which is at most 49% gasoline, rises the same amount. It seems that it would me affected at most half as much as gasoline. Do we import a lot of ethanol from Russia?

I'm curious to know if there's a valid economic basis for this that doesn't involve price gouging.

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    $\begingroup$ I'll ask a couple of questions to help clarify your expectations here. (1) Why does it seem to you that it would be "affected at most by half as much as gasoline"? You mention that the composition of E85 is at most 49% gasoline; so is your thought that (all other things being equal) an increase in the cost of only one factor will increase the cost of producing E85 proportionally less than it affects the cost of E15, E10, or pure gasoline? I.e., do you expect the change in price to be fully explained by the change in the market on the supply side? What about demand-side considerations? $\endgroup$ Jun 2, 2022 at 14:49
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    $\begingroup$ (2) You wrap up by asking "if there's a valid economic basis for this that doesn't involve price fixing." What sort of considerations are you looking for here? What would make a basis "validly economic" by your lights? By "price fixing" do you mean roughly what the FTC means by it, i.e. does it require deliberate collusion between nominally competing sellers or purchasers? Or, if I see a competitor selling E85 @ 10¢/gal more than me, then bump my price by 9¢/gal without ever making an agreement or speaking to them, is that "price fixing" as you mean it? $\endgroup$ Jun 2, 2022 at 15:00
  • $\begingroup$ @AlabamaScholiast Your explanation of my theory is fairly accurate...if my product consists of mixing X and Y equally, and the price of X (per gallon) goes up by $3, I need to raise my price by $1.50 to compensate, not $3. If I buy a circuit board with gold plating, and the price of gold goes up 30%, I don't expect to pay 30% more for the board. That may be overly simplistic, or there may be other considerations in the oil industry; that's what I'm here to find out. $\endgroup$ Jun 2, 2022 at 18:22
  • $\begingroup$ As far as my definition of "price fixing," I'll change it to "price gouging" so it covers anything from a secret cabal of gas station owners meeting at midnight to a tradition of price gouging so well established that it's done tacitly. $\endgroup$ Jun 2, 2022 at 18:24
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    $\begingroup$ E85 and E10/E15 gasoline are what economists call substitute goods (FlexFuel cars that take E85 also take conventional gas). If a supply shock disproportionately affects the price of conventional gas relative to E85, one of the effects of that is that it will pushes out the demand curve for E85, i.e., more consumers will switch over to E85. If more people are trying to buy the same amount of E85, they're going to bid up the price for E85 more than you'd expect if you just projected increases proportional to changes in costs of production. $\endgroup$ Jun 3, 2022 at 15:54

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In the U.S., most ethanol is corn ethanol. Research indicates that corn ethanol has an energy return on investment ratio of between 0.84 and 1.65. This means, basically, that it takes almost as much energy to make a gallon of ethanol, as that gallon contains -- you're either losing 16% in the process, or gaining 65%. Compare this to conventional oil with a ratio above 18.

So the question isn't really about why ethanol prices track gasoline, but why do energy prices track gasoline -- which of course is easier to answer.

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    $\begingroup$ It's true that the costs of energy inputs to ethanol production have increased as the price of natural gas, oil, etc. have increased. On the supply side, you might also note that the commodity price of corn has increased dramatically during the same time, and for much the same reasons (sharp general price inflation; supply shocks in commodity cereal markets due to the Russian invasion of Ukraine, &c). Corn was just over 3 USD/bushel in Summer 2020; in Summer 2022, it's ranging around 7-8 USD/bushel on the commodities markets. $\endgroup$ Jun 3, 2022 at 15:27
  • $\begingroup$ This does make sense, although I'm disappointed to learn the ethanol process is so energy-inefficient. That makes it more like a storage mechanism (like hydrogen, electricity, etc.) than an actual alternative fuel. $\endgroup$ Jun 6, 2022 at 15:59
  • $\begingroup$ @CristobolPolychronopolis corn subsidies in the U.S. are a huge factor in this as well. Ethanol from other feedstocks (such as switchgrass and sugarcane) are much better, and these make up the bulk of supplies in other countries where these crops grow better. $\endgroup$
    – LShaver
    Jun 6, 2022 at 16:05

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