(AP) Burgeoning demand for ethanol is to blame for rising E85 prices - and those numbers are likely to keep going up along with gas prices, Attorney General Mike Hatch said Wednesday.
Hatch's report sought to address consumer complaints about climbing E85 prices and a popular perception that the cost of the corn-based fuel additive should reflect flat or falling corn prices.
Demand for ethanol has shot up since other states started using it to satisfy gasoline blending requirements, after abandoning a common additive linked to water pollution. Minnesota's 16 ethanol plants now sell more than one-third of the 550 million gallons of ethanol they produce annually to customers in California, New York and other states.
"What we see here are the laws of demand and supply," Hatch said. "You've got a limited supply and a big demand and it's chased the price up there."
Minnesota is the nation's top market for E85, with about 200 gas stations selling it. E85 is a blend of 85 percent ethanol and 15 percent gasoline.
A gallon of E85 cost between $2.14 and $2.69 over the past week, according to prices reported to an American Lung Association Web site, www.cleanairchoice.org. That compared with regular gas prices of $2.55 to $2.98 in the Twin Cities on Wednesday, as posted on www.twincitiesgasprices.com.
Vehicles using E85 get between 15 and 20 percent fewer miles per gallon, so E85 isn't a bargain unless the price is proportionately lower. But price isn't the only reason driving consumers to the alternative fuel, said Tim Gerlach, director of outdoor air programs at the American Lung Association of Minnesota.
"We hope people will try it for the price and stay for all those other benefits - the environmental benefits, the fact that it's made here," he said.
Prices at the pump for E85 are several steps removed from most ethanol producers, said Bill Lee, general manager of Chippewa Valley Ethanol Co. in Benson. The middlemen are marketers, wholesalers, oil companies and retailers.
Chippewa Valley gets a federal tax refund for blending its own E85 with gas and passes on a 60-cent-per-gallon discount to consumers, Lee said.
Ethanol is a highly subsidized industry.
Most Minnesota ethanol producers qualify for as much as $3 million a year in state aid. The state also taxes E85 at a lower rate than regular gasoline - 14.2 cents a gallon instead of 20 cents for gas. The federal government refunds 51 cents per gallon of ethanol to the companies that blend it with regular gas, and also gives stations tax credits for installing E85 pumps.
Ethanol plants and blenders are making money as prices rise, Hatch said, adding that the demand for corn helps farmers, too.
The demand will probably keep growing. Minnesota was the first state to require gasoline sold within its borders to contain 10 percent ethanol, and a state law will bump that up to 20 percent by 2013. Montana and Hawaii also have 10 percent ethanol mandates, and the federal government aims to double U.S. biofuels production by 2012.
Also adding to demand, in recent months General Motors and Ford have been heavily promoting their flex-fuel trucks, SUVs and cars, which run on either gasoline or E85.