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Pump Games: Fill Up With Ethanol? One Obstacle is Big Oil

Wall Street Journal Online – April 2, 2007

This article is relevant to all people, if you believe in global warming or not.  Regardless of your beliefs, there are very strong geopolitical reasons to break the liquid fuel monopoly that oil has on the modern day human population.  Efforts to create a viable source of liquid (or gaseous) fuel that can be used to fuel our insatiable transportation needs are very important in the world economy.  It would be great if that alternative liquid fuel would be more eco-friendly causing less pollution and it wouldn’t hurt to have it spit out more CO2 regardless of whether carbon dioxide is affecting climate change or not.

For any alternative liquid fuel to survive, there must be enough of a supply to create a demand.  This is obviously not Econ 101 but it is in the interests of the US government to create incentives for stations to stock these fuels and to push auto manufacturers to create vehicles to burn the fuel.  This is not simply about climate change or global warming – it is about the geopolitics of oil and its source countries.  I understand that oil companies need to protect their brand names and enforce standards among franchisees but the logical conclusion is that they should be create alternative fuel sources to sell to their customers or they might be out of the fuel business one day (just like most railroad companies are out of the people transportation business now – none of the old railroads operate airlines).

This was on the front page of the Wall Street Journal.  I know that many of my readers do not have access to this article as it requires a subscription so I will be a little more liberal in my grabbing of their original content below however there is still a lot of great content that I haven’t reproduced.  I hope that this doesn’t get me in trouble with the good folks at Wall Street Journal.  As always, I encourage you to click through the link below or buy their newspaper.

President Bush, domestic auto makers, farmers and others tout ethanol as a home-grown alternative to imported oil. Across the Midwest, plants that make the fuel out of corn are multiplying at a torrid pace. Yet so far, only a tiny fraction of U.S. service stations let a driver fill up with ethanol. There are a number of reasons, but one big one is resistance from oil companies.  Although some oil executives voice enthusiasm for alternative fuels, oil-company policies make it harder for many service stations to stock a fuel called E85, a blend of 85% ethanol and 15% gasoline.

These policies are hardly the only barrier to wider use of the ethanol fuel. Demand is limited by the small number of vehicles that can burn it — only about 5% of those on the road in America. It can be slightly costlier to burn E85, even though it costs less per gallon, because a car doesn’t go as far on a gallon of the ethanol fuel as on gasoline. These demand restraints would limit service-station owners’ enthusiasm for spending on the equipment needed to offer E85 even if the policies of the oil companies were not a factor.

But those policies add a significant extra obstacle. Oil companies lose sales every time a driver chooses E85, and they employ a variety of tactics that help keep the fuel out of stations that bear the company name. For instance, franchises sometimes are required to purchase all the fuel they sell from the oil company. Since oil companies generally don’t sell E85, the stations can’t either, unless the company grants an exception and lets them buy from another supplier.

Contracts sometimes limit advertising of E85 and restrict the use of credit cards to pay for it. Some require that any E85 pump be on a separate island, not under the main canopy.

Less than 1% stock E85. Some experts say that to really take hold and be seen as a viable alternative to gasoline, the fuel would have to be available at, roughly, 10% of stations.

Among those pressing for wider use of E85 are domestic auto makers, especially Ford Motor Co. and General Motors Corp. Ethanol is one energy initiative where they’re out in front of Japanese car makers.

Owner Phil Becker says the governor wanted the state’s vehicles to use E85 and targeted his station as a popular stop for state workers. He says BP PLC let him get the fuel from a non-BP supplier, and the Illinois Corn Growers Association gave him $100,000 for new tanks and pumps that BP required.  “Because I’ve got E85 and we’ve advertised it, we’ve had four or five farmers that traded their trucks to get E85 vehicles,” Mr. Becker says.

A ConocoPhillips memo to franchisees says the company doesn’t allow E85 sales on the primary island, under the covered canopy where gasoline is sold. Stations must find another spot. As a result, it isn’t quite as simple for a driver to decide on the spur of the moment to fill up with E85. ConocoPhillips declines to comment.

A Chevron Corp. agreement with franchisees also appears to discourage selling E85 under the main canopy. It says dealers offering alternative fuels cannot “deceive the public as to the source of the product,” a phrase that some gas-station interests interpret to mean that E85 can’t be sold under the main canopy. Chevron says it recommends, but doesn’t require, that E85 pumps be outside the canopy.

Chevron says it requires Chevron- and Texaco-branded stations to keep “E85” off their primary signs listing fuel prices. To show the fuel’s price, and alert approaching drivers that E85 is for sale, the stations have to erect a separate sign.

At BP, guidelines for stations that carry the company name bar any mention of E85 on signs on gasoline dispensers, perimeter signs or light poles. The stations also can’t let buyers use pay-at-the-pump credit-card machines.

Mr. Lamberty mocks BP’s “Beyond Petroleum” slogan: “It’s ‘beyond petroleum’ but not so far beyond petroleum that it would contain anything but petroleum,” he says.

E85 also faces barriers having nothing to do with Big Oil, like the limited number of cars that can burn it. Domestic auto makers have vowed to double production of flex-fuel vehicles to about two million a year by 2010 and to make half of their new vehicles sold in America E85-capable by 2012.

ADM, whose yearly output of 1.1 billion gallons is more than 20% of the domestic ethanol market, says it is happy to sell E85 if someone wants it, but that is a “very small” part of its business. “Near term, we have focused more attention on the” additive side, says an ADM executive, Edward Harjehausen.

Even the main ethanol lobbying group in Washington, the Renewable Fuels Association, has focused mostly on developing the market for the fuel as an additive. “If you have a pump that sells E85 but you don’t have customers pulling up to that pump, why do you want to bother?” says Bob Deneen, its chief lobbyist.

Because ethanol is more corrosive than gasoline, there’s some concern it could leak out of a standard dispensing system and spark a fire. No E85 dispensing system — nozzles, hoses, pumps — has been certified by Underwriters Laboratories, the organization that tests the safety of products.  In October, UL suspended certification of parts that had been certified for use in E85 systems. Though there hadn’t been any reports of problems, UL said it decided it needed to do its own safety research. Results aren’t expected until late this year.

Among those trying to overcome obstacles to E85 are the domestic auto makers. They have built flex-fuel vehicles for years because doing so gives them “credits” in their efforts to meet federal fuel-economy standards. Without the credits, Ford and GM wouldn’t have met mileage goals for light trucks in 2003, 2004 and 2005 and would have owed fines. The mileage goals pose a bigger challenge to Detroit because of its heavy reliance on large, thirsty vehicles. Foreign makers generally haven’t resorted to building flex-fuel cars to meet the mileage goals.  For Detroit, the credits applied even if the flex-fuel cars they built never actually burned ethanol. For a long time, the auto makers said little about ethanol, and many owners of flex-fuel cars didn’t know they had them. But when gasoline prices surged in 2005 and 2006, GM and Ford saw their flex-fuel cars as a way to counter their image as gas-guzzler makers.

Among ethanol backers’ recruits are two grocery chains. Kroger installed E85 at about 40 stations in Ohio and Texas. Privately held Meijer Inc. did the same in Michigan and Indiana.

Wal-Mart could provide a significant boost. It said last year it was considering selling E85 at its 388 company-owned stations but hasn’t made a decision.

The U.S. tax code acts as a stimulus. Service-station owners can get a credit of up to $30,000 for their outlays to convert equipment to sell E85.

Some states have done their bit to spur the market. New York enacted a bill last year that barred oil companies from requiring stations to buy all of their fuel from the companies.

In the Albany area, station owner Christian King has begun selling E85 at one of his three Mobil outlets and plans to do so at a second. He says Mobil’s restrictions still mean he can’t put the price of E85 on the main sign or let drivers charge it on their Mobil credit cards.

Adding E85 “is a personal thing,” Mr. King says. “I’m trying to do anything I can to reduce our dependence on foreign oil. And if this thing kicks off, I’m in a position to benefit.”

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