The Net Impact of Ethanol on Househoulds

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June 30, 2008 - Author: William A Knudson

Introduction

There has been a great deal of emphasis placed on the role of biofuels on higher food prices. Research on the issue indicates that the use of crops to produce biofuels, particularly ethanol, has had a small but real impact on food prices at the consumer level (Knudson and Schweikhardt). However, the impact of increased ethanol use on gas prices has not been analyzed.

This paper will look at the net effect of increased ethanol production on households. It will consider two scenarios: a household made up of one person who drives 15,000 miles a year and a household of 4 who drives 30,000 miles a year. It will assume that the vehicle driven by a single person averages 25 miles a gallon, and that the vehicle or vehicles driven by a family of four averages 20 miles a gallon. Food cost estimates will come from other published sources. The analysis is for the U.S. and does not include impacts on foreign countries. It also assumes that oil refinery capacity would not have increased in the absence of ethanol production.

Results show that the net impact of increased ethanol utilization is positive, that is the savings from lower prices resulting from increased ethanol utilization is greater than the higher food costs resulting from diverting corn from food production to gasoline production. The net savings for a single person ranges from $55.60 for a person living in the Rockies to $193.00 for a person living in the Midwest. Net savings for a family of four ranges from $68.50 for a household living in the Rockies to $404.50 for a household living in the Midwest.

Food and fuel have many similar characteristics. Food and gasoline are products that most households have to buy. The supply and demand for both of these items is what economists call inelastic; the quantity supplied and consumed does not vary much with changes in the price of these items. However, changes in supply such as new discoveries of oil, crop failures, technological advance, global disruptions, etc. can cause large changes in price. In this case even through the amount of amount of ethanol used in gasoline is relatively small compared to the total amount of gasoline used; it can have a
relatively large effect on price because it increases the supply of motor fuel.

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