Outlook Tenuous

Detroit's Big Three, eager to lessen reliance on imported oil, are promoting the use of E85 ethanol, particularly for flex-fuel pickups and SUVs, as American consumers ponder the good ol' days when gasoline sold for $2 per gallon.

But E85, a mixture of 15% gasoline and 85% ethanol derived from corn and other grains, has its drawbacks: It is difficult for consumers to find, and it contains less energy than gasoline, requiring drivers to fuel up more frequently because of decreased fuel economy.

And in recent years, E85 was almost as expensive as gasoline. At one point last year, it actually was more expensive. Over the past month, E85 was priced a few cents per gallon less than gasoline, says Daniel Cheng, vice president of automotive consulting firm A.T. Kearney Inc. Cheng co-authored the 10th annual A.T. Kearney Townsend study.

The report finds E85 must be priced 28% below that of a gallon of regular unleaded gasoline to be economically viable. The closest E85 came to gasoline prices was 19%, in early 2005, according to the Townsend study.

“Why would people buy it?” Cheng says of E85. “It has less energy content (about 25% less) than gasoline, which means people have to fuel up more often.”

In addition, despite an ambitious push by ethanol producers and Big Three auto makers, E85 production remains lacking, making mass adoption of E85 as a primary fuel for the U.S. unlikely, Cheng says. “E85 has a capacity problem,” he says. The U.S. currently has about 100 ethanol refineries.

As crude oil prices hover at about $60 per barrel, the market at least remains hopeful for E85 as a fuel source, Cheng says.

“But if the price of oil per barrel goes down to $30 again, no one will talk about E85 anymore,” Cheng says.