Ethanol’s Proven Power in Lowering Gas Prices

By Bob Dinneen | June 13, 2011

Gas prices are a hot, hot topic again. Not simply because summer driving season has officially begun, but because of the economic pain that high gas prices are exacting across America on small businesses and family budgets. Elected officials in Washington are beginning to scramble and are looking for ways to quickly address the pain and avoid a political backlash. Analysts at Goldman Sachs and JPMorgan Chase are predicting that by mid-summer the price of oil will be near or higher than $130 a barrel—a number far too close to the July 2008 record peak of $145 a barrel. What does this mean for drivers? Gas prices may rise to their highest levels yet this year. Goldman Sachs has predicted $5 a gallon. And yet in the midst of this economic storm, ethanol is still not getting the credit it deserves for the proven impact it has had in lowering prices thus far or for the fact it is the only solution that is available right here, right now.

The increased use of ethanol reduced wholesale gasoline prices by an average of 89 cents per gallon in 2010, according to a new study conducted by economists at Iowa State University and the University of Wisconsin and released by the Center for Agricultural and Rural Development. The new analysis, an update to a 2009 energy policy paper authored by professors Dermot Hayes and Xiaodong Du, also found that the growth in ethanol production reduced gasoline prices by an average of 25 cents, or 16 percent, over the entire decade of 2000-’10. Further, the study determined that gas prices could double if ethanol production came to an immediate halt.

According to the new CARD analysis, the marginal impact of ethanol on gasoline prices in 2010 was even more pronounced, as oil prices rose and ethanol production expanded to 10 percent of the gasoline pool. In 2010 alone, based on data from the Federal Highway Administration, Environmental Protection Agency and Department of Energy, the average household consumed 900 gallons of gasoline at an average price of $2.74 per gallon. That means the average family’s annual gasoline bill was $2,470, but it would have been closer to $3,270 without ethanol. Ethanol reduced the average American household’s gasoline bill by more than $800.

The new study, which was sponsored by RFA, also examined what would happen to U.S. gasoline prices if ethanol production came to an immediate halt. The authors found that, “Under a very wide range of parameters, the estimated gasoline price increase would be of historic proportions, ranging from 41 to 92 percent.” At today’s prices, that means gasoline prices would increase from roughly $4 per gallon to $5.60 to $7.70.

Americans deserve better than what they are getting. They simply can’t afford to pay more at the pump. They deserve lower prices, cleaner fuel and alternatives to foreign oil. If 200 small businesses producing more than 13 billion gallons of renewable fuel and sustaining nearly 400,000 jobs across the economy aren’t reasons enough to support ethanol, then ethanol’s proven power to lower gas prices right here, right now should be.

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