Many Americans understand the age-old adage that “nothing is so bad that it couldn’t get worse.” So although $4 gas is bad news, the prices could be higher and the situation worse. According to the U.S. DOE, the price of gas could be as much as $4.35 per gallon under different circumstances.
So what’s keeping the extra 35 cents off each gallon of gas at the pump? According to the DOE, it’s biofuels. The department says that without biofuels—ethanol in particular—gasoline prices would be 20 to 35 cents higher.
In a letter sent to U.S. Sen. Jeff Bingaman, D-N.M., chairman of the Senate Committee on Energy and Natural Resources, by Secretary of Energy Samuel Bodman and Secretary of Agriculture Ed Schafer, the secretaries concurred that biofuels are moderating gasoline prices. Statistics from the DOE reveal that for a typical household, the average savings being realized annually is $150 to $300. The overall significance of biofuels to the United States is laid out in the letter’s statistics that say the country has seen a $28 billion to $49 billion savings based on an annual gasoline consumption of roughly 140 billion gallons.
A study conducted by Xiaodong Du, research assistant at the Center for Agricultural and Rural Development at Iowa State University, and Dermot Hayes, professor at ISU’s Department of Economics, shows similar numbers compared with those quoted by the DOE. “Estimation results show that over the period of 1995 to 2007, ethanol production had a significant negative effect of 29 to 40 cents per gallon on retail gasoline prices,” the study summary says. “The results suggest that this reduction in gasoline prices came at the expense of refiners’ profits. These results are statistically significant across a range of model specifications and across all regions.”
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The study also states, “The availability of ethanol essentially increased the capacity of the U.S. refinery industry and in doing so prevented some of the dramatic price increases often associated with an industry operating at close to capacity.”
The ISU study concluded: “Had we not had ethanol, it seems likely that the crude-oil refining industry would be slightly larger today than it actually is, and in the absence of this additional crude oil refining capacity, the impact of eliminating ethanol would be extreme.” The ISU study can be viewed at www.card.iastate.edu/publications/DBS/PDFFiles/08wp467.pdf.
The “E” stickers on gas nozzles at many gas stations nationwide indicate the percentage of ethanol mixed with the gasoline (i.e., E10, E85). Everyone in the ethanol industry knows that if you remove that percentage of ethanol from the gasoline, more gasoline is required.
It could just as well stand for Easy-to-understand.
