Does Ethanol Keep Our Gas Cheap?

by Brian McGraw on June 22, 2011

in Blog

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Under attack from almost everyone these days, the ethanol industry has been digging deep to find ways of convincing America that they really are the best. They’ve been running advertisements everywhere claiming that ethanol (and presumably, federal ethanol policies) have helped to keep the price of gasoline up to $0.89 per gallon cheaper in 2010. They commissioned a report from the Center for Agriculture and Rural Development at Iowa State University. The report itself merely updates similar research from past years, the original study can be found here. The abstract (of the 2010 report):

This report updates the findings in Du and Hayes 2009 by extending the data to December 2010 and concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon. Based on the data of 2010 only, the marginal impacts on gasoline prices are found to be substantially higher given the much higher ethanol production and crude oil prices. The average effect increases to $0.89/gallon and the regional impact ranges from $0.58/gallon in the East Coast to $1.37/gallon in the Midwest. In addition, we report on a related analysis that asks what would happen to US gasoline prices if ethanol production came to an immediate halt. Under a very wide range of parameters, the estimated gasoline price increase would be of historic proportions, ranging from 41% to 92%.

This conclusion surprised me. CARD has credibility, and has been more than willing to counter misleading ethanol narratives in the past. However, these results should be highly suspicious, as the price of a gallon of ethanol tracks the price of gasoline fairly closely (and of course, its more expensive adjusting for the lower energy content), so it would be difficult to see how a 7-10% blend of ethanol could keep the price of gasoline down so much. The final sentence, suggesting that gas prices would shoot up if “ethanol production came to an immediate halt” makes one wonder about the intentions of those who commissioned the research, as barring some sort of economic or natural disaster, ethanol production would never come to an immediate halt.

The RFA press release quoted one of the academics involved with the study:

“The US now obtains at least ten percent of its gasoline from ethanol,” said Professor Hayes. “The ramp up in this industry has been very fast and as a result there have been significant and measurable impacts on  gasoline prices, particularly in regions of the country where ethanol use is greatest. These impacts have grown as the industry has expanded and are largest in 2010.  A secondary impact of this ethanol expansion is that it has substituted for an expansion and modernization of US oil refining capacity that would otherwise have been needed.

His comment here kind of acknowledges that absent ethanol, gasoline wouldn’t be whatever percent higher, as refining capacity is not a fixed variable.

From here, we take it over to the folks at the Institute for Energy Research who spent a long time looking at this study. Their conclusion:

The recent Iowa State study claiming that ethanol production has suppressed the growth in gasoline prices is very misleading. It takes for granted the current refinery capacity and other infrastructure that industry uses to deliver gasoline to motorists, without realizing that federal policies over the years have distorted the development of these markets. Ethanol only survives in the market place at its current levels because it is propped up by artificial mandates and preferential tax treatment.

The regression analysis of the Iowa study doesn’t accurately capture the timeline that would have occurred had the free market been allowed to operate. Of course a sudden disappearance of all ethanol would cause a bigger price spike in the Midwest than in the East Coast. That’s because the artificial federal support has displaced the development of oil-based gasoline delivery in the Midwest more than in other regions. The fact still remains that ethanol (at its current market share) is very inefficient. Taxpayers and consumers would be richer if the government dropped its support programs for it.

Yep.

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