Study says ethanol has negligible impact on gas prices

Source: Amanda Peterka, E&E reporter • Posted: Friday, October 11, 2013

A pair of researchers from the Massachusetts Institute of Technology and the University of California, Davis, are disputing claims that have found ethanol has significantly lowered the price of gasoline at the pump.

In a study, the two researchers say previous work incorrectly used “crack ratios,” or a comparison of the price of gasoline with the price of oil, to determine that ethanol has lowered the price of gasoline by more than $1 per gallon on average. Ethanol, they say, has only a negligible impact on what consumers pay at the gas station.

“The point of our paper is not to say that ethanol doesn’t have a place in the marketplace, but it’s more that the facts should drive this discussion,” said Christopher Knittel, MIT professor of energy and applied economics, in a statement today.

Knittel and Aaron Smith, UC Davis professor of agricultural and resource economics, published their results online last summer; the work is slated to soon appear in the peer-reviewed Energy Journal.

Widely cited work by researchers from Iowa State University and the University of Wisconsin over the past few years has found that ethanol reduced the 2010 price of gasoline by 89 cents a gallon on average and by $1.09 a gallon in 2011. That work relied largely on crack ratios to come to its conclusions.

Whether ethanol has lowered the price of gasoline continues to be a point of contention between fans of the federal biofuels mandate and a coalition of groups attempting to repeal or reform the renewable fuel standard. Opponents say studies do not account for the fact that a car can drive fewer miles on gasoline that contains ethanol than a car driving on pure petroleum-based gasoline.

In their new paper, Knittel and Smith say an increased proportion of gasoline in ethanol has merely correlated with a decrease in the crack ratio and did not contribute to lower gasoline prices compared to the price of oil. When the changing price of oil is accounted for, ethanol’s impact on gasoline price “simply goes away,” Knittel said.

Eliminating ethanol from the gasoline pool may cause a temporary disruption in price, but the impact would last only as long as a month, they said.

“In the very short run, if ethanol vanished tomorrow, we would be scrambling to find fuel to cover that for a week, or less than a month,” Knittel said. “But certainly within a month, increases in imports would relax or reduce that price impact.”

Dermot Hayes, an Iowa State University economist and an author of the Midwest study finding ethanol lowered gasoline prices, has disputed the results of the new study. In an exchange posted on Knittel’s faculty homepage, he said that the findings misrepresent his previous work and that the two researchers appeared to be taking a “mean-spirited and accusatory tone” in their rebuttal.

Hayes said that his study used control variables to isolate the effect of ethanol on gasoline prices and that it also examined crack spread, the difference between the price of crude oil and the products that come from it, like gasoline. It was clear that if ethanol plants were closed, there would be a “serious” impact on gas prices, he said in a working paper published last fall.

More recently, a former MIT economist, Philip Verleger, calculated that the federal renewable fuel standard, which mandates increasing levels of ethanol use each year, means consumers are paying between 50 cents and $1.50 per gallon less for gasoline.

Verleger, a famed energy economist who is currently president of PKVerleger LLC, said in a short analysis online last month that the 2007 RFS has cut overall consumer expenditures on gasoline by between $700 billion and $2.6 trillion. Without ethanol, crude oil prices would be between $15 and $40 more per barrel today, he said.