A earnings surprise in the oil refining industry
In answering Jason Gabelman’s question in an April 28, 2026 quarterly earnings conference call:
“How have massive dislocations in the market changed how you think about investment opportunities and how you run the business in the medium term?” — Jason Gabelman, TD Cowen Research
the Chief Executive Officer’s response included:
“As the hydrocarbon prices have increased, so has the value of octane and, ethanol being an octane component, has now become the cheapest form of octane in the world.” — Lane Riggs, CEO, President and Chairman, Valero Energy
And in answering a follow-up question from Matthew Blair:
“The ethanol results seem pretty good, better than our expectations. Was that just a function of improving values on the coproducts?”– Matthew Blair, Tudor, Pickering, Holt & Co. Securities, LLC, Research
the response included:
“Everyone sees that ethanol as a cheaper form of liquid fuel. So you’re seeing demand in ethanol.” –Eric Fisher, Senior Vice President of Product Supply, Trading & Wholesale, Valero Energy
This response from Valero would be surprising to some of their peers and prominent industry associates who do not see ethanol as a cheaper form of liquid fuel. They still hold that ethanol is in our gasoline only because of government mandates that make ethanol a more costly fuel.
But industry-best technical and economic information proves that, even aside from the current massive dislocations, increased ethanol in gasoline reduces consumer gasoline cost:
- on a per-gallon basis,
- on a per-octane-gallon basis,
- and on a per-mile travelled basis
This surprising fact stems from the exceptional octane value of ethanol, combined with refinery octane production constraints that have caused an underlying tightness in U.S. summer octane-gallon production capacity.
“Refinery octane production constraints have caused an underlying tightness in U.S. summer octane-gallon production capacity”
George hoekstra, in the RBN Energy Blog “I love a piano”, Aug 8, 2024
How much does ethanol reduce consumer gasoline cost? On a per-octane-gallon basis (that’s the right unit of measure for answering this question) ethanol is 4.5 times cheaper than incremental refinery octane.
“On a per-octane-barrel basis (that’s the right unit of measure for answering this question), ethanol is 4.5 times cheaper than incremental refinery octane.”
George Hoekstra, in “The Octane value of ethanol”, June 24, 2025
Use of ethanol in gasoline reduces gasoline costs for consumers, increases profits for ethanol producers (like Valero) and increases profits for other refiners (who lose gasoline sales volume but more than offset that by lower octane production costs).
George Hoekstra, george.hoekstra@hoekstratrading.com, +1 630 330-8159
