University Report: Ethanol Reduced Gas Prices $0.89 in 2010

May 02, 2011

University Report: Ethanol Reduced Gas Prices $0.89 in 2010

*Gas prices could almost double to "historic proportions" if ethanol production immediately halted

*Drivers saved an average of $0.25 per gallon from 2000-2010

*If ethanol disappeared, gasoline price would rise by as much as 92%

*Annual savings from 2000-2010 averaged $34 billion dollars

(May 2, 2011)  Washington –  The increased use of ethanol reduced wholesale gasoline prices by an average of $0.89 per gallon in 2010, according to a new study conducted by economists at Iowa State University and the University of Wisconsin and released by the Center for Agricultural and Rural Development (CARD). The new analysis, an update to a 2009 Energy Policy paper authored by professors Dermot Hayes and Xiaodong Du, also found that the growth in ethanol production reduced gasoline prices by an average of $0.25, or 16%, over the entire decade of 2000-2010. Further, the study determined that gas prices could double if ethanol production came to an immediate halt.

“This study confirms that ethanol is playing a tremendously important role in holding down volatile gasoline prices, which are currently inching closer to all-time record highs,” said Renewable Fuels Association (RFA) President Bob Dinneen. “As rising oil prices are contributing to higher retail costs for everything from gas to food to clothing, ethanol is clearly providing some real relief for American families.”

“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.   If ethanol production were to come to a sudden halt, due perhaps to a poor corn crop, there would be a dramatic increase in US gasoline prices and the resulting increase in US gasoline imports would also cause world gasoline prices to increase in the short run.”

Department of Energy data shows U.S. gasoline use averaged 138 billion gallons per year from 2000 to 2010, meaning annual savings due to ethanol during the decade averaged $34.5 billion.

According to the new CARD analysis, the marginal impact of ethanol on gasoline prices in 2010 was even more pronounced, as oil prices rose and ethanol production expanded to 10% of the gasoline pool. “In 2010 alone, ethanol reduced the average American household’s gasoline bill by more than $800,” Dinneen said, citing data from the Federal Highway Administration, Environmental Protection Agency, and Department of Energy that show the average household consumed 900 gallons of gasoline at an average price of $2.74 per gallon in 2010. That means the average family’s annual gasoline bill was $2,470, but it would have been closer to $3,270 without ethanol.

The new study, which was sponsored by RFA, also examined what would happen to U.S. gasoline prices if ethanol production came to an immediate halt. The authors found that, “Under a very wide range of parameters, the estimated gasoline price increase would be of historic proportions, ranging from 41% to 92%.” At today’s prices, that means gasoline prices would increase from roughly $4 per gallon to $5.60-$7.70.

The authors point out that this dramatic result stems from the fact that “…the ethanol industry now provides approximately 10% of the gasoline used in automobiles, an amount that exceeds the spare capacity of US oil refineries.” If ethanol suddenly disappeared, they say “[the] ‘missing’ fuel would have to be imported in the short run, and the required volume would be large relative to available import supplies. The only way to solve this short-term supply problem would be to use high gasoline prices to ration demand.”

Dinneen said that finding alone should serve as a wake-up call to those who are seeking to reduce or eliminate the role of ethanol in the U.S. energy market at a time when oil markets are increasing volatile.

“At a time when the economic recovery is fragile and oil markets are increasingly volatile, policymakers should be embracing—not shunning—ethanol’s ability to add to domestic fuel supplies and hold prices in check. While it isn’t realistic to assume that all ethanol production would ever come to an immediate halt, this analysis shows just how important ethanol is to our fuel supply,” Dinneen said. “If we woke up tomorrow morning and the 10% of our gasoline supply that comes from ethanol was gone, it’s easy to see how gasoline prices could nearly double. That type of increase would be absolutely crippling to the American economy.”

Ethanol’s impact on gasoline prices over the past 10 years has been largest in the Midwest, according to the study. On average, wholesale gasoline prices were reduced by $0.39 per gallon in the Midwest region from 2000 to 2010, the study found.

The study is available at the Center for Agricultural and Rural Development web site (http://www.card.iastate.edu/publications/synopsis.aspx?id=1160) as well as on the RFA web site.