Study says ethanol decreased wholesale gas prices by $1.09 per gallon in 2011

May 18, 2012
by DTN

U.S. farmers supplying corn to the ethanol industry are helping consumers keep money in their pockets at the pump, according to a study released last Tuesday by the Center for Agricultural and Rural Development (CARD) at Iowa State University (ISU).

The production of ethanol in the U.S. reduced wholesale gasoline prices by an average of $1.09 per gallon in 2011. The research, authored by Professors Dermot Hayes and Xiadong Du, is an update of a 2009 report from CARD based on the impact ethanol has on gasoline prices.

The report comes at a time when the U.S. ethanol industry faces increased pressure from members of Congress to change or eliminate the Renewable Fuels Standard (RFS). RFS requires gasoline blenders to use billions of gallons of ethanol annually.

In addition, the 45-cent volumetric ethanol excise tax credit, or VEETC, expired at the end of 2011. The industry, however, has been taking steps to expand the ethanol market by moving E15 to the pump.

The study found that the main factors that contribute to ethanol’s role in reducing gas prices include higher oil and gasoline prices, higher ethanol inclusion, and ethanol being priced at a discount to gasoline. Ethanol’s effect on gas prices increased by 20 cents from the 2010 savings of 89 cents per gallon, the study found.

“Growth in U.S. ethanol production has added significantly to the volume of fuel available in the U.S.,” said Dermot Hayes, ISU professor of economics and finance. “It is as if the U.S. oil refining industry had found a way to extract 10 percent more gasoline from a barrel of oil.”

U.S. ethanol production reached a record high of more than 13 billion gallons in 2011. The average price of a gallon of regular-grade gasoline was $3.52 in 2011. Without that production, the study said, gasoline prices would have been closer to $4.60.

“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 chief executive officer of the Renewable Fuels Association, which helped fund the research.

“Because ethanol makes up 10 percent of our gasoline pool today, it significantly reduces demand for oil and puts downward pressure on gas prices.”

Ethanol has helped keep gasoline prices an average of 29 cents cheaper per gallon since 2000. Based on these annual savings, American drivers and the economy saved more than $477 billion in gas costs, or an average of $39.8 billion a year, according to the study. On a smaller scale, ethanol saved American households an average of more than $1,200 in 2011.

“From coast to coast and border to border, ethanol is helping save consumers money,” Dinneen said. “Without ethanol helping to keep some measure of control on skyrocketing energy prices, our economy and household budgets across the country would be in terrible shape.”

Ethanol benefits at the pump vary across regions based on how much ethanol is produced locally. The Midwest has seen the largest gasoline price reductions with average savings of 45 cents per gallon from 2000-2011. The Gulf Coast showed the smallest gasoline price reduction with savings of 19 cents per gallon. — Lindsay Calvert, DTN