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.