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How Alternative Fuel Pricing Works

        Auto | Fuel Economy

Ethanol Prices
This Cheveron gas station in the Georgetown neighborhood sells E85. The downtown Enterprise car rental branch also uses the station to fill their flex-fuel vehicles.
This Cheveron gas station in the Georgetown neighborhood sells E85. The downtown Enterprise car rental branch also uses the station to fill their flex-fuel vehicles.
Chip Somodevilla/Getty Images

Ethanol, one of the most talked about alternative fuels, is derived from renewable sources, mainly corn. Essentially, it's the same as grain alcohol and can be used as energy in many cars. Some see ethanol as a good way for the United States to lessen its dependence on foreign oil, since it's a domestic product that comes right from crops in the Midwest.

­Veh­icles rarely use 100 percent ethanol as a fuel -- instead, a certain percentage of ethanol can blend with gasoline for a cleaner-burning fuel. For instance, you can find E10, a mixture of 10 percent ethanol and 90 percent unleaded gasoline, in 46 percent of America's gasoline, and it will work in any vehicle. E85, on the other hand, is a blend of 85 percent ethanol and 15 percent unleaded gasoline -- it only works in flexible fuel vehicles (FFVs), although the auto industry is producing more and more of these kinds of cars each year.

Predicting the price of ethanol is tricky and unpredictable, since the gasoline industry blends it with gasoline itself, and demand for the fuel has gone up and down despite a steadily increasing supply. Actually, you can think of the price of something like E85 as a slightly lower gas price, because that's just what adding ethanol to gasoline does -- it simply lowers the price of the gas with which it's combined. The October 2007 Clean Cities Alternative Fuel Report noted the national average price of E85 as $2.40, while the average for gas was $2.76.

Still, the majority of the price of ethanol more or less depends on the price of corn. Since oil affects the prices of food (high prices increase the costs of distribution), recent spikes in oil prices should have pushed corn prices up -- but they haven't yet, and ethanol blends have managed to stay a bit lower than gas. Congress also taxes ethanol at a lower rate so it can compete with gas. The United States General Accounting Office states that "motor fuels consisting of at least 10 percent biomass-derived ethanol are exempt from 5.4 cents of the 18.4-cents-per-gallon federal excise tax" [source: GAO].

And just like regular gasoline, the price of ethanol blends will vary depending on the region. Prices in the upper Midwest are generally lower, because the ethanol doesn't have that far to travel. Prices in the Rocky Mountain region are a bit higher, on the other hand, because it costs more to send the ethanol out there.

What about biodiesel? To learn more about biodiesel prices, read the next page.


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