January marked the first month that the ethanol industry had to stand on its own feet was only supported by a massive taxpayer mandate for their product, rather than tax preferences, tariff protections, and a mandate.

Do not fret, as sales for E10 (10% ethanol 90% gasoline, commonly purchased at the pump) will hold remarkably steady, because this is the primary venue the rent-seekers use to dilute our nations gasoline supply with ethanol. I only slightly kid, as it makes sense to blend small percentages of ethanol into our fuel supply, though not in amounts exceeding 10 percent.

However, in the United States there are also niche markets for E-85, which is made up of 85% ethanol and 15% gasoline. E85 sales more accurately reflect what an actual competitor to gasoline would look like, as E10 blends only supplement regular fuel production. While there are a number of flex-fuel vehicles on the road (FFVs) capable of running on any blend of ethanol and gasoline, E85 sales have never taken off in the United States. This is because, after adjusting for the lower energy content in ethanol, it costs more money per mile traveled to fuel your vehicle with E85 than E10. It has always been this way and its unclear if it will ever change.

The lapse of the volumetric ethanol tax credit (VEETC) in January made this much worse, as E85 was receiving a tax credit worth just short of 40 cents per gallon, allowing the fuel to be sold more cheaply than it would absent the tax credit. Sales of E85 in Minnesota are about to discover this new reality:

The post-subsidy era also brings tough choices for owners of flexible-fuel vehicles, including the state of Minnesota, which has more than 3,000 vehicles capable of burning E85, and in 2010 used 963,000 gallons of it.

They must decide whether to support a fuel that is 85 percent home-grown ethanol even it it’s no longer competitively priced. Minnesota is the nation’s fourth-largest ethanol producer, and leads the nation with 364 retailers selling E85.

“We have our eyes open, and we are watching this,” said Tim Morse, director of Minnesota’s fleet. “We think it is too early to make any kind of decision right now.”

Morse said he wants to see if the full 38 cents of lost E85 subsidy gets added to the state’s fuel price. That could boost the state’s annual E85 bill by $366,000.

Last week in the Twin Cities, E85 was 16 cents to 40 cents lower than regular gasoline, which also rose in price. That’s as little as a 5 percent price difference. E85′s price advantage has sometimes been more than four times better and averaged 17 percent last year, according to the state Commerce Department.

The state of Minnesota has been purchasing E85 for state-owned flex fuel vehicles in the past. It isn’t clear if this saved them money, which is incredibly unlikely, or if they were doing it out of “statriotism.” Regardless, even now they feel the need to balance budget savings versus the very minute and possibly non-existent environmental benefits of corn ethanol.

More broadly, this demonstrates why the ethanol mandate is non-sensical and needs to be abandoned. Cellulosic ethanol has hit its 4th or 5th straight year of still being “right around the corner” and even environmentalists are becoming skeptical of its touted environmental benefits, after seeing the realities of corn ethanol. Allowing increasing blends of ethanol beyond E10 into our fuel supply is a pointless handout to an industry friendly with the Obama Administration. It’s hurting our refining industries which already operate on very low margins, and consumers have demonstrated that they prefer the price savings to vague and questionable environmental benefits.

Something will have to give soon. Our fuels market is not ready to go beyond E10 (and absolutely not beyond E15 in its present form), and consumers are not going to purchase E85 or flex fueled vehicles unless it saves them money. If not abandoning the ethanol mandate completely, the EPA could start by capping it (or suggesting that Congress cap it) at its current level.