Head Like a Hole

  John Eichberger |  April 2019

There are some issues that so entrench stakeholders into their own camps, that it is difficult to weigh in to try to provide some perspective without taking a side or being attacked. Yet, that is exactly what the Fuels Institute is supposed to do – look at data objectively and try to help advance the discussion without a desired outcome.  So this month, let’s grab hold of that third rail and talk about E15. I am going to buckle up for this one, because I expect to get earfuls from many of my friends on both sides of this issue.

With that expectation, let’s play with the music selection. I recently saw Buckcherry live in a very small venue (capacity of 650), and it was a great show. They opened with their cover of Nine Inch Nails hit song Head Like a Hole. I love both versions – the power and the energy of this song is incredible. Its relevance to this topic is loose, but think about this:  if you don’t want to look at the data objectively, you have essentially stuck your head into a hole and maybe the chorus resonates with that behavior:

Head like a hole.
Black as your soul.
I’d rather die than give you control.
Bow down before the one you serve.
You’re going to get what you deserve.

Necessary Disclaimer:  The Fuels Institute does not advocate for nor weigh in regarding any regulatory, legislative or market initiative and, for that reason, it has no position on whether E15 should be sold year-round or at all. But, given the significance this issue has for the market as a whole, I thought it might be interesting to look at some of the data.

At Issue

Before we continue, let me explain what is going on today – or, to quote Inigo Montoya from The Princess Bride, “Let me sum up” so as to not spend pages on details.

In 2011, the Environmental Protection Agency issued final rules approving E15 for commerce, provided its use was restricted to light duty vehicles manufactured in model year 2001 or later or as flex-fuel vehicles. The approval specifically excluded the use of E15 in any other vehicles, boats or gasoline-powered equipment. A label containing specific language is required for any retailer choosing to sell E15.

Attention-E15.jpg

The administration is working now on a rule enabling the year-round sale of E15, a gasoline product containing 15% ethanol.  To date, sales have been restricted to non-summer months due to vapor pressure regulations. There are various perspectives on this regulatory approach and it is likely that the administration will be sued, whichever way they ultimately act. Some believe the administration has the authority and justification to make this change independently; others believe only an act of Congress can change the regulations affecting the sale of E15.

The Fuel Retailers

While the debate about E15 has been furious, market expansion has been slow.  According to Prime the Pump, there are nearly 1,800 stations in the U.S. selling E15, and they report that dozens of terminals now offer E15 directly at the rack, compared to only five terminals who did so in 2017. The geographic diversity is impressive, but the store count is very limited. With just 1,800 stores selling E15, market penetration is less than 2%. But, there is significant opportunity for growth.

(For more insight into the retailer perspective, check out the Fuels Institute article that was featured in NACS Magazine in February 2018.)

Personally, I have had many conversations with fuel retailers and have learned that the issue of year-round sales is a significant hurdle that has kept expansion limited. Imagine a customer who on May 31 refuels with E15, but on June 1 is told they are not allowed to do so. How might that customer react?  The reaction will likely not be directed at the regulators but at the retailer who yesterday sold him a product that he is not allowed to use today, potentially eroding trust in that retailer. I have had many retailers tell me that if this restriction were removed, they would much more seriously consider adding E15 to their product offer.

There are also compatibility issues that must be addressed if a retailer is going to sell E15. All equipment storing and dispensing motor fuel must be listed as compatible with that fuel. This means underground storage tanks, pipes, connectors, attached equipment and dispensers all must be compatible. If a retailer does not know the compatibility rating of equipment underground, it is incumbent upon that retailer to replace unknown equipment to ensure compatibility or risk major potential liability. Above ground, most dispensers are listed only for E10 – but E25 compatible units can be acquired for pretty much the same price as E10 units, assuming the retailer is ready to replace his dispensers. This potential capital investment to upgrade facilities is another impediment to E15 expansion.

The Vehicles

Ultimately, assuming a retailer has compatible equipment and is ready to sell E15, he has to consider his customers. The EPA has said vehicles since model year 2001 are fair game – but will that cover a retailer in the event E15 causes a warranty violation in a more recent vehicle? How quickly have the automakers adapted their production and warranties to open the door for E15? 

E15 advocates point out that more than 80% of vehicles on the road today are eligible to use E15 under the EPA’s approval. They argue that EPA would not have approved the fuel unless it was confident that the fuel would pose no harm to the environment or risk to the vehicles for which it was approved. (“E15 is the most tested fuel in history,” I have been told repeatedly.) They further point to the billions of miles that have been driven using E15 (specifically referencing the use of the fuel in NASCAR) without problems. I must admit that I am personally aware of no high profile issues associated with E15, although that does not mean that there have been no issues experienced by consumers.

EPA’s approval of E15 for 2001 and newer vehicles is not necessarily supported by the automotive industry, however. The American Petroleum Institute has been monitoring warranties to better understand this situation. The following chart was provided to me by API and is presented here with their permission:

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Source: American Petroleum Institute

Now, an opponent of E15 would immediately look at this chart and say, “Wow! Look at all the red! There are almost no cars warrantied for E15.”  Of course, if you look back to 2001, there will be at least 10 years in which E15 was not mentioned in vehicle warranties because it did not exist. Since then, there has been quite a bit of progress in terms of automakers making adjustments to their warranties to permit E15 – but it is not ubiquitous.

How much market share do the green boxes in this chart represent?  Assuming the data from API is correct, the following chart shows the sales market share by manufacturers of E15-warrantied light duty vehicles from 2014 – 2018, excluding models that API has indicated were not approved for E15. Now, I recognize this is not exact because this data is based upon sales, many of which might be from the prior model year. But it gives us an idea of market share potential – ranging from about 58% of vehicles sold to nearly 90% in 2018.

Vehicles-Warranted-for-E15.png

So clearly, the majority of the automobile manufacturing industry has grown to accommodate E15 – but not all of it, which is a major point of those who express caution about E15. Another thing to remember is a chart I show all the time – how long it takes to convert the fleet.  If the first warrantied vehicles started to enter the market in 2012 and by 2018 nearly 90% of new vehicles were so warrantied, how long will it take for the fleet to be represented by a majority of vehicles approved by manufacturers for E15?  I am not going to attempt to do the actual math, but the following chart reminds us how long it takes to turn over the fleet with a new vehicle feature assuming 100% adoption on January 1, 2018.

New-Vehicles.png

Final Perspective

The debate about E15 will continue for many years, regardless what happens with the proposal to enable year-round sales. I believe that, should year-round sales be approved, there will be a substantial increase in the number of stations that sell E15. This is a product currently offered with an octane rating of 88 (slightly higher than regular grade gasoline) at a price point that is often 5 to 10 cents per gallon less expensive. I have argued for years that consumers do not understand octane, but they believe a higher number means it is better and typically more expensive. When E15 is presented with a higher number at a lower price, it may seem like Christmas every day for some consumers. That is a gift many retailers will want to deliver.

Today, nearly all vehicles on the road are approved by EPA to use E15. And each year, more and more consumers are driving vehicles that are warrantied for E15. This may not be the case for the majority today, and it may be many years before the number of E15 warrantied vehicles represents the majority, but it is coming in the near future. This situation is not sufficient to satisfy the concerns of some stakeholders, but it is reassuring to the aspirations of others.

Regardless of the outcome you prefer, understanding the data is important and I love data:

No, you can’t take it
No, you can’t take it
No, you can’t take that away from me.