Ethanol Still Not Lowering the Real Cost of Gasoline

by Brian McGraw on March 29, 2012

in Blog, Features

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In the wake of high gasoline prices, the ethanol industry is making the rounds in Washington, and they want you to believe that the Renewable Fuel Standard has lowered gasoline prices by up to $.89 per gallon. This would be remarkable, if it were true. The ethanol industry relies on a study produced by the Center for Agricultural and Rural Development at the University of Iowa. Here is the abstract:

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%.

If we go to E85prices.com, we see that as of March 29, 2012 the average nationwide price-spread between E85 and E10 is 14.7%, with E85 costing an average of $3.31/gallon and E10 costing an average of $3.89/gallon. Ethanol has less energy content than gasoline, so a direct price comparison is not appropriate. The generally accepted metric is that E85 must be priced about 28% lower than E10 in order to break even, meaning that the cost per mile driven is equal between E85 and E10.

Ethanol is blended into gasoline at refineries throughout the United States, and most gasoline that is sold in the United States is composed of 10% ethanol, 90% gasoline. If ethanol was really responsible for massively lowering the real cost (adjusted for energy content) of gasoline, we would expect E85 (a rough estimate of the actual cost of delivering ethanol to market) to cost much less than gasoline, below the break even point at least. As you can see, it doesn’t, and after adjusting for energy content ethanol is still more expensive than gasoline.

What the study does is it looks at refinery capacity throughout the United States. Refineries in the United States often run at close to max capacity, meaning if there were suddenly a very large increase in the demand for gasoline (suppose that every car driving American decides they want to take a road trip across the country, beginning tomorrow), refineries would be unable to immediately ramp up production, and gasoline prices would skyrocket. The same would happen, as the author notes in the abstract above, if ethanol production were to suddenly disappear overnight, as their refining capacity would drop precipitously.

The study holds refinery capacity constant over the past years, and models the effect that an absence of ethanol would have on gasoline prices. This is not a realistic assumption as there is no reason to believe that in the absence of ethanol, more refining capacity would have been built in the United States over the past decade.

I wrote about this same study in June of last year, and will quote the conclusion of analysis written by the Institute for Energy Research then:

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.

The final sentence is key. Despite generous subsidies for decades and a federal mandate, the real cost of ethanol is still higher than gasoline. Even the environmentalists are on our side on this issue, having realized that the environmental benefits of ethanol production are non-existent and the net effect (once you consider how much land globally has been converted to grow corn) is possibly worse than regular petroleum production.

 

 

Robert White March 29, 2012 at 11:19 am

Thought I would point out a few issues with the article, since it suggests the opposite of reality. Here are a few key points.

I have no idea what market you reviewed when writing this article, but ethanol is selling for a price that is 34% less than gasoline today, This would make the cost of E85 21% less than gasoline and E10 cost 3% less than gasoline. The price at the pump is not dictated by the ethanol industry, it is dictated by the fuel retailers. The costs shown above are public, anyone can view them.

Anyone that uses the need of a 28% price differential for E85 has never used the product. Having driven nearly one million miles on E85, the average fuel economy loss is around 15%, some as high as 20%, still making E85 attractive if priced appropriately.

There has not been a refinery built in three decades, and no one truly believes that more would have been built if ethanol was not around, we would simply pay more for more imported finished gasoline.

The Volumetric Ethanol Excise Tax Credit (VEETC) expired on 12/31/11, so as suggested in your closing paragraph, that is done. However, nothing was done about the federal support programs provided to Bil Oil.

Farmers grow less acres of corn today than in 1930.

In closing, ethanol is providing a domestic, renewable, cleaner-burning fuel that does make a substantial impact to our economy and provides thousands of jobs. It is an industry that continues to improve on all aspects of efficiency is important for our country today.

charles langer March 29, 2012 at 8:27 pm

Go to fuel economy.gov and compare the cost to run flex vehicles on e85 vs gas. Brian’s numbers are right. Ethanol people will throw numbers at you that are not actual. I believe they would rather people not know the truth. Take some time compare cost to run multiple flex vehicles on e85 vs gas, these are real numbers by a non bias site. How could it be proven any better? The goverment needs to remove the mandates and allow the market to correct itself. I think we know what the out come will be. Since e85 is a choice, what percentage flex vehicles actually use e85 rather than gas? I believe it is probably less than 5%.

Matthew W March 30, 2012 at 11:10 am

One statistical lie::
“Farmers grow less acres of corn today than in 1930.”

Instead, tell us the difference in total BUSHELS being produced.

Liberals and greenies need to get past the idea that at this very time we need to “reinvent” gasoline.

sam March 29, 2012 at 4:12 pm

Robert go to fueleconomy.gov and check out the cost to run e85 vs gas in a flex vehicle. Brian’s information is dead on. Ethanol is being sold in the red because of over production. At 10-15% more to run on e85 in a flex vehicle is the best I’ve seen in the last year. It’s usually 20-30% more, I don’t know where the ethanol industries get their numbers, but what could be more accurate than a goverment site that actually tests the vehicles. It’s refreshing to have Brian talk about these numbers because they are very comparable to what the vehicles test out at. The goverment needs to quit picking winners and losers, remove the mandates and allow the people to decide what makes most sense. If ethanol is saving people the amount ethanol industries are saying, that choice would be easy, but the fueleconomy.gov site is far more accurate and truthful for a very good reason.

gofer March 29, 2012 at 4:13 pm

Having driven over 600,000 miles in the past 7 years, I can tell you, from my experience, ethanol is nothing but a filler. I’ve done numerous comparisons on mileage and find less mileage with ethanol. On a 300 mile run, I use about 3/4 -1 gallon more fuel (e-10), than with non-ethanol. I estimate I’ve burned between 1000-1500 gallons that were completely wasted. Of course this is not scientific, but there’s no doubt, the mileage is decreased. The amount will vary by individual circumstances.

gofer March 29, 2012 at 4:15 pm

I don’t like putting stuff in engines that absorb moisture.

charles langer March 29, 2012 at 4:28 pm

Robert go to fueleconomy.gov and check out the cost to run a vehicle on E85 vs gas,10-15%more. Ethanol is priced in the red because of over production and less fuel usage in a bad economy. Over the past year most times its been 25-30%more. Brian’s numbers are very accurate and fueleconomy.gov is are very good site to compare the numbers, pick your vehicle the numbers average out. Flex vehicles average 13 mpg. I am amazed people allow this to go on. If the ethanol people are so confident they are saving people that amount of money remove the mandates and allow the people to make the best decision.

charles langer March 29, 2012 at 4:44 pm

Robert go to fueleconomy.gov and compare the cost to run a flex vehicle on E85 vs gas. 10-15% more on E85, ethanol is being sold in the red because of to much supply it’s normally 20-30% more. Brian’s numbers are very accurate and they check out with fueleconomy.gov. Ethanol needs to sell for 70% the price of gas to be break even. The only reseason for mandates is to force people to make a choice they normally would’t. People With flex vehicles have a choice and I would bet very few use E85 vs gas. Goverment needs to remove the mandates and allow the market to correct itself.

charles langer March 29, 2012 at 8:15 pm

Fuel economy.com proves Brians point. Just choose several flex vehicles and compare the cost to run e85 vs gas. Brian’s numbers are right. Ethanol people will do anything to support their product. When university puts out these numbers that dont hold up to actual perforance it show you what their credability is. Actual performance is what should be more important. Flex vehicles average 13 mpg on e85. Remove the mandates and allow the market to correct itself.

Brian McGraw March 30, 2012 at 8:52 am

Robert,

I linked to e85prices.com in my post, not sure how you missed it.

You can also visit the Alternative Fuels and Advanced Vehicles Data Center at the Department of Energy (http://www.afdc.energy.gov/afdc/vehicles/flexible_fuel_what_is.html?0/E85/) and use their cost calculator to come to the same conclusion.

But you work for the Renewable Fuels Association so I think its quite obvious that we will never agree on this issue.

Brian McGraw

Brendan March 31, 2012 at 1:21 am

I have a Flex Fuel vehicle that tells me actual miles per tank of gas with E85 and with regular gasoline. A full tank of E85 gas will get me 257 miles a tank. A full tank of regular gas gets me 331 miles a tank. A full tank of ethanol costs 41 bucks. A full tank of regular gas costs 70. Ethanol does, in fact, save me a bundle. I just have to fill up more often when I use it consistently.

jlsmith April 1, 2012 at 8:06 pm

The ethanol crowd has time on its side. Weather you like it or not, cheap oil is gone and the price to extract oil from the ground will only continue to increase. The debate about mileage lost is mute. You cant burn what you don’t have and eventually over time, the price difference between ethanol and gasoline will move in the direction of ethanols favor.
Engines that are optimized for ethanol have proven to produce more power, with less fuel and fewer cubic inches. The savings in weight and increased efficiency result in higher mpg for ethanol than gasoline.
Either get on the cart, or get out of the way.

Gerald Gallagher April 3, 2012 at 6:28 am

Too bad we don’t pay government ‘experts’ and other employees on their actual results not the b.s. they make- up. Gas is cheaper to produce than E10; if the oil companies won’t refine in this country,THAT is something congress could mandate. Don’t tell us something that has less energy is better than gas-oh, and more destructive to the earth.Check the owners and supporters of E10 and E85-are they politically connected?bet your ass they are. We raise food prices,get worse fuel mileage , ruin our vehicles AND pay too much at the pump-where can I get it? Know this:the people we pay to look out for us suck. Lie,cheat,steal to make their stats work.

Geoff Sander April 7, 2012 at 9:29 am

Here are two concrete facts that disprove the ethanol claims;

If ethanol yielded more energy than is required to produce it, everyone would be doing it & getting rich in the process. Obviously if one BTU of energy produced ethanol with two BTU of energy, the chain reaction would have the world swimming in cheap energy. Even if the increase was very small, the end result would be the same.

Ethanol usage is forced on us and production is subsidized by governments all over the world. If ethanol is cheaper than gasoline, why does it have to be subsidized & why are laws required to force us to use it? You can see that if ethanol production was really competitive with gasoline, production plants would be springing up all over the place. In fact, oil producers PAY taxes and ethanol producers RECEIVE tax dollars.

Using common sense is a far more effective way to gauge the world than relying on every self-serving “scientific study” that rolls across the landscape. Read more in Kids Before Trees; get it at https://www.smashwords.com/books/view/80505

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