A key objective of U.S. energy policy is to increase biofuel use by highway vehicles to 36 billion gallons per year by 2022. The Energy Independence and Security Act envisions that nearly all of this target will be met by gasohol (E10) or neat ethanol (E85). Since the market for blending ethanol with gasoline at 10% by volume will saturate at about 15 billion gallons, most of the ethanol will need to be sold in the form of E85 unless higher order blends are approved by automakers and the Environmental Protection Agency. The demand for E85 is likely to be very sensitive to the relative prices of E85 and gasoline and to the availability of E85 at retail outlets. The key objective of this study is to estimate the sensitivity of aggregate demand for E85 to the relative availability of E85 versus gasoline at retail outlets, as well as the sensitivity of E85’s market share to the prices of E85 and gasoline. Monthly data from the state of Minnesota for the period 1997 to 2008 are used to estimate a model of E85 choice by owners of flexible fuel vehicles. The results indicate that E85 availability at 10% to 20% of retail outlets might be sufficient to achieve a very substantial market share given an appropriate price advantage for E85.

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David L. Greene
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