New University Study: Ethanol Reduced Gas Prices by More than $1 in 2011

May 15, 2012

New University Study: Ethanol Reduced Gas Prices by More than $1 in 2011

Reminder:  A media call with one author of the report, Professor Dermot Hayes, will occur at 2:00 p.m. Eastern today.  Call information is 1-800-247-5110; passcode is Ethanol2.

(May 15, 2012)  Washington - America’s growing use of domestically-produced ethanol reduced wholesale gasoline prices by an average of $1.09 per gallon in 2011, according to updated research conducted by economics professors at the University of Wisconsin and Iowa State University.  The 2011 results, which are up from an average impact of $0.89 per gallon in 2010, were released today by the Center for Agricultural and Rural Development (CARD). 

[Read RFA’s summary of the report here.]

The new analysis, an update to a 2009 peer-reviewed paper published in Energy Policy by professors Dermot Hayes and Xiaodong Du,  also found gasoline prices have been reduced by an average of $0.29 per gallon, or 17%, from 2000-2011 thanks to  the growing use of ethanol. 

“Growth in US ethanol production has added significantly to the volume of fuel available in the US,” said Professor Hayes. “It is as if the US oil refining industry had found a way to extract 10% more gasoline from a barrel of oil. This additional fuel supply has alleviated periodic gasoline shortages that had been caused by limited refinery capacity.  It has also changed the relative prices of gasoline and diesel and allowed the US to switch from being a net importer of gasoline to a net exporter. As a result of these changes, US gasoline prices are measurably lower than would otherwise have been the case. This gasoline price impact has been documented in a peer reviewed academic journal and the price dampening effect has increased as ethanol production has grown. This impact is greatest in the regions of the country where ethanol penetration is greatest.”

Three primary factors are responsible for ethanol’s more robust price benefit at the pump in 2011:  higher oil and gasoline prices, higher ethanol inclusion, and ethanol being priced at a larger-than-normal discount to gasoline.

As the economists noted, “Average crude oil price increased from about $80/barrel in 2010 to about $95/barrel in 2011. Correspondingly, average U.S. wholesale gasoline prices have risen 30% from 2010-2011.  A wider than normal price differential between ethanol and gasoline prices provides further economic incentives for ethanol production and consumption…”

Based on data from the Census Bureau and Energy Information Administration, 116.7 million U.S. households consumed 131.2 billion gallons of gasoline in 2011, for an average of 1,124 gallons per household. That means ethanol reduced the average American household’s spending on gasoline by more than $1,200 in 2011.  Since 2000, the $0.29-per-gallon price dampening impact of greater domestic ethanol use has saved the American economy an average of nearly $40 billion per year. As a result, ethanol has helped the average American household reduce its spending on gasoline by an average of more than $340 per year since 2000.

“While it’s hard to imagine that gas prices could be even higher than they are now, this study clearly underscores that the current pain at the pump would be far worse without ethanol,” said Bob Dinneen, President and CEO of the Renewable Fuels Association, which helped fund the research.  “Because ethanol makes up 10% of our gasoline pool today, it significantly reduces demand for oil and puts downward pressure on gas prices. From coast to coast and border to border, ethanol is helping save consumers money.  In these times of high unemployment and sky-high gas prices, ethanol is one America-made solution that is providing some respite for battered American families trying to make ends meet.”

Key conclusions derived from the report include:

  • In 2011, ethanol reduced wholesale gasoline prices by an average of $1.09 per gallon.
  • Regular grade gasoline prices averaged $3.52 per gallon in 2011, but would have been closer to $4.60 per gallon without the inclusion of more than 13 billion gallons of lower-priced ethanol.
  • The average American household consumed 1,124 gallons of gasoline in 2011, meaning ethanol reduced average household spending at the pump by more than $1,200.
  • Since 2000, ethanol has kept gasoline prices an average of $0.29 per gallon cheaper than they otherwise would have been.
  • Based on the $0.29-per-gallon average annual savings, ethanol has helped save American drivers and the economy more than $477 billion in gasoline expenditures since 2000 – an average of $39.8 billion a year.