CARD report: Ethanol reduced gas prices by more than $1 in 2011

By Holly Jessen | May 15, 2012

A Center for Agricultural and Rural Development report shows that increasing ethanol production and higher crude oil prices in 2011 had a substantial impact on wholesale gasoline prices. As a result, ethanol reduced the price of wholesale gasoline by an average of 89 cents in 2010 and $1.09 in 2011. “This impact is greatest in the regions of the country where ethanol penetration is greatest,” said one of the study’s authors, Dermot Hayes, professor of economics and of finance at Iowa State University. The price decreasing impact ranged from 73 cents per gallon in the Gulf Coast to $1.69 per gallon in the Midwest.

The new analysis is an update to a 2009 peer-reviewed paper published in Energy Policy by Hayes and Xiaodong Du, assistant professor in the Department of Agricultural and Applied Economics, University of Wisconsin-Madison. The professors found that from January 2000 to December 2011, the growth in ethanol production reduced gas prices by 29 cents per gallon on average and 45 cents per gallon in the Midwest. “Growth in U.S. ethanol production has added significantly to the volume of fuel available in the US,” Hayes said. “It is as if the U.S. oil refining industry had found a way to extract 10 percent more gasoline from a barrel of oil.”

Adding ethanol to the fuel supply helps alleviate periodic gas shortages and changed the relative price of gasoline and diesel, he adds. It has also allowed the U.S. to switch from being a net importer of gasoline to a net exporter and has resulted in lower U.S. gasoline prices. “The price dampening effect has increased as ethanol production has grown,” he said.

In 2011, a total of 116.7 million U.S. households used 131.2 billion gallons of gas, averaging 1,124 gallons of gas per household, according to data from the Census Bureau and U.S. Energy Information Administration. The average price of regular grade gasoline was $3.52 a gallon—however, that price would have climbed to about $4.60 per gallon without the inclusion of lower-priced ethanol. In all, ethanol cut average household spending at the pump by more than $1,200. “While it’s hard to imagine that gas prices could be even higher than they are now, this study clearly underscores that the current pain at the pump would be far worse without ethanol,” said Bob Dinneen, president and CEO of the Renewable Fuels Association, which helped fund the research. 

Researchers also addressed the question of how ethanol’s lower energy density affects the results of their study. Ethanol theoretically decreases fuel energy by 2 to 3 percent, or 0.5 or 0.8 miles per gallon for a car averaging 27 miles per gallon, according to the U.S. EPA. Gasoline priced at $3.50 per gallon equates to a 2.5 percent reduction in energy value or 8.7 cents per gallon. “In theory, this means a gallon of gasoline blended with 10 percent ethanol would need to be priced at $3.41 per gallon to provide the same cost per mile as a gallon of unblended gasoline priced at $3.50 per gallon,” the report said. “However, ethanol is blended with gasoline primarily for its additive properties, such as boosting octane and oxygen content, not strictly as a source of energy for combustion. Regardless, the impact of ethanol’s lower energy content on gas prices is much smaller than the price impacts we have measured and does not change the overall conclusions of our analysis.”