Ethanol impact on gasoline prices

Study finds ethanol impact lowered wholesale gasoline prices $0.16 to $1.37 per gallon over past decade.

Du and Hayes conducted a study that was published in Energy Policy to assess the impact ethanol has had on gasoline prices. In the 2009 study, they used data from prior to 2008. Since then, ethanol production in the United States has increased more than 50 percent. The authors recently updated the report findings using up through 2010. The purpose of the study was to quantify the impact of ethanol on gasoline prices paid by consumers. Regional and national impacts as well as long- and short-term impacts were included.

Long-term impact

During the first decade of the new millennium, ethanol production increased from 1.8 to 13.2 billion gallons per year in the United States. This growth in production resulted in an average decrease of wholesale gasoline prices during this period by $0.25 per gallon nationally. On a regional basis, the East Coast showed the smallest savings at $0.16 and the Midwest had the largest saving at $0.39 per gallon. The Midwest is home to large corn production areas as well as ethanol refineries and uses more ethanol.

Short-term impact

The long-term national savings tells the story of price impact averaged over a decade. With recent spikes in gasoline prices and increased production of ethanol, data for 2010 only was analyzed separately to get an idea of impact more recently. During 2010, the East Coast had the lowest savings of $0.58 per gallon and the Midwest had the highest saving at $1.37 per gallon.

The decrease in wholesale gasoline prices by region for two time periods in the United States.

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What if we eliminated ethanol?

The drought of 2012 has fueled the threat of a crop shortage, resulting in record-high commodity prices. A variety of organizations, mostly led by livestock producers and food processors, has urged congress to relax or reduce the Renewable Fuels Mandate requiring the blending of 13.2 billion gallons of ethanol in 2012. But what would happen to the price of gasoline if we were to eliminate ethanol? This report found that under a wide range of parameters the gasoline price increase would be of “historic proportions” ranging from a 41 to 92 percent increase. With a little math, we can see that using $3.75 pump prices (as of August 23, 2012), eliminating ethanol would result in pump prices ranging from $5.28 to $7.20 per gallon.

For more information, read the full report: The Impact of Ethanol Production on US and Regional Gasoline Markets.

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