How Alternative Fuel Pricing Works

A sign shows fuel prices at Capital Mini Mart on May 10, 2007, in Belmont, Wis. E85, a blend of 85 percent ethanol and 15 percent gasoline, is also offered. See pictures of alternative fuel vehicles.
Mark Hirsch/Getty Images

Petroleum "shocks" aren't anything new. Although the theory of peak oil consumption has been a popular topic of discussion recently, the first worldwide scares over the availability of oil occurred in 1973. The Organization of Petroleum Exporting Countries (OPEC) raised oil prices -- and subsequently gas prices -- when it cut back on oil supplies to countries that supported Israel during the Yom Kippur War. This oil crisis, along with a subsequ­ent energy crisis in 1979, led some people to think about diesel as an alternative to gasoline.

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As tensions between OPEC and importing countries lessened, gas prices eventually stabilized and the demand for diesel-powered vehicles decreased. (They remain popular in Europe, since the European Union continues to set strict emission standards.) Still, the events were a hint that we might have needed to get away from our oil dependence.

More than 30 years later, recent spikes in gas prices have drivers frustrated at the pump. We all need a way to get around, but the limited availability of public transportation systems like subways in the United States leaves us few choices. On top of this, concerns over global warming and the impact petroleum has on the environment have many worried about the future of the Earth. Some are now looking into alternative fuels and alternative fuel vehicles (AFVs) as solutions to oil dependency. Although definitions can vary, alternative fuels are anything other than the two conventional, petroleum-based fuels, gasoline and diesel. They include ethanol, biodiesel, propane, natural gas and electricity (energy from batteries or fuel cells), among others. Several of these fuels offer better efficiency and burn more cleanly than gas, so they might be more desirable to someone who wants to save both money and the environment.

­But just as petroleum-based products are subject to pricing, so are alternative fuels. And, as sources of energy, both kinds of fuel compete with each other. But how are the prices of fuels like ethanol and biodiesel set, anyway? Is it any different from the way gas prices are set? And for someone thinking about switching to an AFV, would it be less expensive in the long run if you're paying for something other than gasoline? To learn about alternative fuel prices and how they compare to gas prices, read on.


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.
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.


Biodiesel Prices

A man fills up his 55 gallon drum with biodiesel fuel at the Biofuel Oasis in Berkeley, Calif.
David Paul Morris/Getty Images

The other major biofuel, biodiesel, is used, of course, in diesel engines. Like ethanol, it's derived from renewable sources -- in biodiesel's case, vegetable oils or fats -- but, unlike ethanol, it can burn in diesel engines whether it's a blend or pure biodiesel (B100). Many people are surprised to learn that Rudolf Diesel, the inventor of the diesel engine, originally thought of vegetable seed oil as the engine's main fuel.



­Raw materials and transportation decide most of the price for biodiesel. The most common ingredients used to make biodiesel are soybean oil and yellow grease, the latter of which comes from soy oil, canola oil and the other oils used for cooking french fries and other fried foods. Fast food restaurants recycle and reuse these oils as much as they can, but after a while it doesn't serve a cooking purpose. Biodiesel producers can then purchase the used yellow grease and convert it into biodiesel. Acquiring and processing the soybean oil and yellow grease accounts for as much as 80 percent of the price. Biodiesel also gets a $1 per gallon discount on federal excise tax, which lowers the overall price for consumers.

The price of biodiesel ultimately depends on the blend. B20, for instance, cost about $3.08 in October 2007, three cents lower than regular diesel's $3.11 average at the time. B100, on the other hand, cost higher at an average of $3.38, due to the increased amount of production that goes into making pure biodiesel.

Many companies that use vehicles with diesel engines are switching to biodiesel because of the potential to save money. Newer diesel engines rarely have to be modified to use biodiesel, and it doesn't cost much to retrofit older ones. In Oregon, for example, construction companies that use diesel engines and modify them with retrofit devices for improved performance are eligible for as much as 50 percent in tax credits [source: Oregon Environmental Council]. With better fuel efficiency and cleaner emissions, biodiesel looks to help many businesses using diesel engines, but it could affect more than just big trucks on the highway. The production and profit potential for biodiesel, according to the University of Wisconsin's Center for Sustainability and the Global Environment (SAGE), is huge, and the department suggests in a report that countries could produce as many as 51 billion liters a year.

To learn more about propane, natural gas and electricity, read the next page.


Propane, Natural Gas and Electricity

A 24-hour self-service propane fueling station in Austin, Tex.
Jana Birchum/Getty Images


­You probably know propane from barbecues -- it's the­ fuel in that little white cylinder attached to the side of the grill. Although propane isn't considered an alternative fuel for heating houses or grilling purposes, it's the most popular alternative to gasoline and diesel. It's unique in that it's not produced or refined like biofuels. Instead, it's a byproduct of natural gas processing and oil refining. Propane and butane (the same fuel used for lighter fluid) are collected during production in order to keep these liquids from condensing and causing processing difficulties.


But even though it comes from the same place as gasoline, it still has to compete with it. Many things can affect the price of propane, but the main factors include the cost of crude oil, the prices of other competing fuels, the balance of supply and demand, the distance propane must travel to customers and the time of year. Because demand for propane is much higher during the winter due to increased heating use, prices will be higher during these months. This causes prices to hover above and below gasoline -- while propane may be cheaper than gas in the summer time when supplies are higher, demand in winter will raise costs above gas prices. In October 2007, propane was $2.75, one cent cheaper than gas.

Natural gas is one of the three fossil fuels -- the other two are oil and coal. It's mostly comprised of methane, or one carbon atom and four hydrogen atoms. It's drawn up from underground wells just like oil, processed to remove byproducts, and then stored by the gas company. This process affects about 75 percent of the price, while distribution costs determine the other 25 percent. Again, taxes and region may cause prices to vary, but natural gas is one of the cheapest and cleanest-burning alternative fuels -- in October 2007, the national average was only $1.77, almost a dollar less than gasoline.­

Electricity prices for electric cars are the easiest prices to determine -- it's just about the same you pay for electricity to power the light bulbs in your home. Although prices vary by region, season and even the time of day you charge an electric car's battery, the national average for electricity in the United States is about 7.5 cents per kilowatt-hour (kWh). An electric vehicle with an efficiency of 3 miles per kWh will cost about 3 cents a mile, while a gas-powered engine that gets 18 miles per gallon will spend about 14 cents per miles when gas prices are $2.50.

For lots more information on cars, energy and related topics, see the next page.


Lots More Information

Related HowStuffWorks Articles
More Great Links

  • "Alternative fuel vehicles." National Renewable Energy Department. Sept. 2003.
  • "Availability and use of alternative fuel." National Highway Traffic Safety Administration.
  • "Clean alternative fuels: compressed natural gas." United States Environmental Protection Agency. March 2002.
  • "Clean Cities alternative fuel price report." U.S. Department of Energy. Oct. 2007.
  • "Comparing energy costs per mile for electric and gasoline-fueled vehicles." Advanced Vehicle Testing Activity.
  • "Ethanol factbook: a compilation of information about fuel ethanol." Clean Fuels Development Coalition. 2003.
  • "Propane prices." Energy Information Administration. Jan. 2008.­/brochures/propane/index.html
  • Johnston, Matt and Tracy Holloway. "A global comparison of national biodiesel production potentials." The Center for Sustainability and the Global Environment. Sept. 7, 2007.
  • Radich, Anthony. "Biodiesel performance, costs, and use." Environmental Information Agency. June 8, 2004.