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Article in Wall Street Journal 2 April 2007

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

The author of this article describes the current situation of the ethanol-based fuel E85 (85% ethanol, 15% gasoline) to replace the use of gasoline in transportation in the United States. Many believe that ethanol fuel is one possible solution to reduce our dependence on imported oil. Furthermore, E85 fuel burns cleaner than gasoline and is therefore better for the environment. The one downfall of E85 is that it is slightly more expensive in terms of price per mile driven. However, this does not explain why consumers have refused to adopt the use of ethanol fuel.

To begin, only certain cars that are E85 compatible are able to use this fuel. Although Ford and GM are currently working on developing “flex-fuel” cars that can use either E85 or gasoline, there are very few cars currently available that are compatible with E85. The second problem is the main obstacle: as a consumer, where can I buy E85 fuels? There are currently only approximately 1000 gas stations in the US, about one percent of the total, that offer E85. Many state that the main obstacles to providing E85 fuel are big oil companies. For example, since gas stations are franchises, the owner of a franchise could provide E85 oil. However, main oil companies prohibit this because they do not provide E85 fuel and they do not want their franchises to sell products that aren’t there’s. However, I believe that another major factor is due to a network effect.

Imagine yourself as the owner of a gas station. You happen to have the permission from the oil company of your franchise to sell E85 at your pump. However, to provide E85, you need to install a new tank and pump system, since E85 cannot be mixed with gasoline. Therefore, there is large initial investment required to provide E85. Here’s where the network effect takes place. Why would you pay so much money to provide ethanol-based fuel, which won’t sell very well due to a limited amount of customers? Furthermore, as a customer, I would not want to spend on a new car that is ethanol compatible if it is too hard to find this fuel. The fact that gasoline is so readily available and easy to sell prevents both sellers and consumers to make the switch to E85.

Perhaps government subsidies and the rise in the price of oil could help sales in E85. If enough consumers begin to adopt E85, perhaps this could trigger a network cascade that would cause more stations to provide it and therefore convince more consumers to buy it. However, for the moment, it seems that subsidies from government and non-government organizations to help stations provide E85 are what keep this type of fuel alive.