Ethanol Standing Between Us and OPEC

By Bob Dinneen | May 12, 2011

Common sense suggests that when you replace 10 percent of a market with a cheaper alternative, it will put downward pressure on prices.  That is currently the case with respect to America’s use of ethanol.  And now, new research on the impact ethanol has on gasoline prices puts real dollar values on what we all knew to be true.

According to two economics professors from Iowa State University and the University of Washington, the use of more than 13 billion gallons of ethanol in 2010 alone, kept gasoline prices 89 cents cheaper than they otherwise would have been.  That translates to a savings of more than $800 a year for an average U.S. family. 

The research also looked at the role of ethanol in helping rein in gas prices from the decade from 2000-’10.  The growing production and use of ethanol helped keep gas prices 25 cents per gallon lower on average than they would otherwise have been.  Based upon U.S. DOE data on gasoline use, that translates to more than $34 billion in savings at the pump annually during that time period.  These savings dwarf the $6 billion in investment in 2010 in the form of the ethanol blenders credit. 

Perhaps most interesting about the study is the hypothetical scenario that analyzes gasoline price reaction should ethanol supplies disappear overnight.  According to the professors, gasoline prices would rise anywhere from 41 to 92 percent.  Assuming a gas price of $4 per gallon, such a scenario could send prices well above $7 per gallon. Now, we all know that such a scenario is unlikely.  America’s ethanol producers have a history of providing a stable, dependable supply of renewable fuel 12 months out of the year.  But, it should open the eyes of lawmakers and other industries that would seek to eliminate America’s domestic ethanol industry.

As Dermot Hayes, one of the study’s author notes, the expansion in domestic ethanol production “has substituted for an expansion and modernization of U.S. oil refining capacity that would otherwise have been needed. If ethanol production were to come to a sudden halt, perhaps due to a poor corn crop, there would be a dramatic increase in U.S. gasoline prices and the resulting increase in U.S. gasoline imports would also cause world gasoline prices to increase in the short run.”

As Congress debates American energy policy in earnest, it must recognize the contributions of domestic ethanol production.  Not only does ethanol production provide the only sustainable, renewable alternative to gasoline today, it is fundamentally altering oil and gasoline markets and helping shield consumers and the U.S. economy from the vagaries of OPEC and the world oil market. 

It is time for Congress to pass strong energy legislation that properly and responsibly incentivizes the continued growth and evolution of America’s ethanol industry while eliminating wasteful subsidies for last century’s energy technologies.

Author: Bob Dinneen
President and CEO of the
Renewable Fuels Association
(202) 289-3835