Governors' Biofuels Coalition

Prices of premium and regular grades of gasoline without ethanol are likely to rise in Nebraska and Iowa, and those fuels may become harder to find as oil refiners and fuel blenders driven by self-interest and the federal Renewable Fuel Standards lower the octane of the basic product they deliver to terminals in the region.

Motorists might be unhappy, but ethanol producers will love it, because it demonstrates even more commitment to the subsidized fuel additive and drives demand.

AAA representatives nationally and locally said they doubted premium-grade prices would rise as high as estimates tossed around by some in the industry.

“Any predictions about dramatic price increases for premium fuel at the retail level are purely speculation,” said Rose White, spokeswoman for AAA Nebraska. “We will likely see some increase for premium fuel if the demand increases.”

There could be shortages of premium gasoline, difficulty finding stations with gas not blended with ethanol and a wider spread between blended and unblended, according to some surveys of the industry.

Prices of ethanol blends aren’t expected to spike.

Pipeline company Magellan Midstream Partners confirmed it would stop delivering 87-octane regular-grade gasoline to terminals in Lincoln, Doniphan and Omaha by mid-September and would deliver 84-octane “V-grade” regular instead. Phillips 66, too, confirmed it would have 84-octane at its Lincoln terminal, as NuStar Energy will at its four terminals.

The introduction of “sub-octane” 84 here continues the growing adoption of ethanol in the overall U.S. gasoline pool, according to Platt’s, an oil industry publication. The Midwest is the last of the regions in the United States to offer sub-octane.

To reach Nebraska’s minimum legal octane of 87 east of the 100th meridian, distributors or retailers will have to raise 84 octane by adding ethanol or premium-grade gasoline. So there should be more demand and higher prices for premium grade, and higher costs for 87-octane regular without ethanol. Ethanol production already is ramping up to take advantage of the market in federal credits for Renewable Fuel Standard compliance.

West of the 100th meridian, which runs through Cozad, regulators allow an 85-octane minimum because of the altitude. Wyoming refineries dominate supplies in the western area.

For retailers, the new blends will mean a significantly higher price for 87-octane gasoline without ethanol, said Bill Walljasper, chief financial officer of Casey’s General Stores, the Ankeny, Iowa, chain that has scores of stations in Nebraska and more in Iowa.

“I can’t say what that is, but it could be 20 to 30 cents higher,” he said.

Retailers will have to decide whether they want to offer that product at a higher price or eliminate it altogether, he said. In Lincoln, Casey’s will offer 87-octane with and without ethanol and a premium-grade gas, he said, but that could change, depending upon demand.

Magellan plans to offer gas to retailers at 87, 89 and 91 octane at its terminals, with or without ethanol, said spokesman Bruce Heine. Magellan’s refined products pipeline system runs from Houston through northern Minnesota, with a major injection point in Tulsa, Okla.

Heine said the Magellan pipeline ships, but doesn’t own, the product. He said the decision on what to offer was driven by customers, who are refiners, petroleum traders and marketers, a term the industry uses to refer to retailers. They want greater flexibility to mix products and more uniformity across states, he said. Allowing them to blend their own mixtures also increases efficiency and reduces the risk of a shortage, he said.

NuStar Energy, which has four terminals in Nebraska, said it would start accepting a sub-octane (83-84). It will offer two 87-octane blends, two 89-octane blends, one 91-octane blend and E85, spokeswoman Joanna Weidman said in an email.

“To ensure we’re able to meet demand, we have an ongoing capital project to increase ethanol storage at our Geneva, Neb., terminal,” she said.

Steve Sorum, ethanol projects manager at the Nebraska Ethanol Board, said of the new product: “It appears to be an attempt by refiners to increase profitability by producing lower-octane gasoline, thus getting more gallons out of a barrel of crude oil.”

The Nebraska Energy Office said the change in gasoline formulation was being driven by several factors, including simplification of gasoline production.

“By eliminating the 87-octane gasoline, refiners will be able to more readily supply gasoline to all regions, lessening the number of state-specific formulas,” the office said.

The switch certainly demonstrates the energy market’s wild demand for Renewable Identification Numbers, or RINS, the basic currency of the federal Renewable Fuel Standards, which require refiners and importers to use an escalating amount of renewable fuels such as ethanol. The RINS are proof of compliance by those obliged to meet the standards, can be bought and sold, and have skyrocketed in value in the secondary market this year.

Adjusting the gasoline feedstock’s octane from 87 to 84 allows those in the market to capture the octane, and the RINS, by adding 10 percent ethanol to produce 87 octane.

A new study commissioned by the Iowa Renewable Fuels Association estimates the wholesale cost of the blended regular 87-octane gasoline without ethanol will be 30 cents a gallon more than ethanol-blended fuel after the change. It costs distributors more not to offer ethanol blends, in part because the government subsidizes it.

One unidentified industry official told The Associated Press the increased demand could drive the pump price for regular 87-octane gasoline 30 to 52 cents higher per gallon than ethanol-blended fuel.

More than 95 percent of gas sold nationwide is 10 percent ethanol, said Michael Green, a national spokesman for AAA.

“Most consumers already use ethanol fuel blends,” AAA’s White said in a statement. “They will not be impacted by this change. For those who remain concerned about their older car, recreational vehicle or small-engine unit, we recommend that you check your owner’s manual first before using any new fuel blend.

“Most consumers will find that the new low-grade blend will meet the manufacturer’s requirements or recommendations. If the new blend is not recommended, consumers may need to consider using a premium fuel, which currently costs an average of 27 cents more per gallon.”

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