Ethanol Lowers Fuel Prices Dramatically

Ethanol saved the average U.S. motorist about $800 last year, says a study by Iowa State University and University of Wisconsin economists. Without ethanol, gasoline prices in U.S. would rise almost 92%. Blending ethanol with gas resulted in savings of 89 cents per wholesale gallon last year.

Published on: May 19, 2011

The impact of ethanol production on U.S. and Regional Gasoline Markets for the period 2000 to 2010 was evaluated by economists the Center for Agricultural and Rural Development at Iowa State University. The results of the study, released last week, show that blending ethanol with gasoline had a dramatic effect on lowering fuel prices, with the Midwest region receiving the most benefit.  

* The CARD study reports that increased use of ethanol reduced wholesale gasoline prices by an average of $0.89 per gallon in 2010.  

* Midwesterners benefited the most from ethanol because last year they saved $1.37 per gallon compared to the national average of $0.89.

* The growth in ethanol production reduced gasoline prices by an average of $0.25, or 16% over the entire decade of 2000 - 2010.

* Department of Energy data shows U.S. gasoline use averaged 138 billion gallons per year from 2000 to 2010, resulting in an annual average savings due to ethanol of $34.5 billion.

* Last year alone, ethanol reduced the average American household's gasoline bill by more than $800, according to the Renewable Fuels Association.

* Since ethanol now makes up nearly 10% of the gasoline used in automobiles in the U.S., CARD's economists measured the impact of ethanol's disappearance from the fuel market. If ethanol was no longer available, gas price increases would be of historic proportions, rising by as much as 92% in the short-term.

For a link to CARD's study, go to

http://www.card.iastate.edu/publications/dbs/pdffiles/11wp523.pdf

Companion study looks at ethanol policy's impact on corn prices

The Center for Agricultural and Rural Development at ISU also last week issued a policy brief on the impact of ethanol and the ethanol blender's tax credit (Volumetric Ethanol Excise Tax Credit – VEETC) on corn prices. The tax credit provides blenders and marketers with a 45-cent per gallon credit for every gallon they blend with gasoline. CARD's analysis covered corn marketing years 2005-2009, in comparison to 2004. The study found:

* The analysis shows that the absence of VEETC would have lowered corn prices by only 4% from 2004 to 2009. The largest difference in corn prices, in 2007, would have been $0.30 per bushel, or only 7%. According to the authors of the study, "This relatively small change in corn prices necessarily implies that the contribution of ethanol subsidies to food inflation is largely imperceptible in the United States."

* VEETC contributed only 14 cents to average corn prices from 2006-2009. Therefore, 92% of corn price increases was caused by non-policy factors, such as floods, droughts and a severe recession.

With or without VEETC, corn prices would have:

* Risen from 2005 to 2007 and declined through 2009

* Would have still risen dramatically in 2007, to $3.75 per bushel

Corn price spikes and sharp declines would have occurred without VEETC or even if corn ethanol production had not expanded. 

* Weather can have a huge influence on corn prices. The 2004 bumper crop was largely responsible for lower corn prices that year.

* CARD's economic model indicates if ethanol production had been capped at 2004 levels, it would not have lowered corn to the $2.00 per bushel range today. That is because relatively stronger crop prices for other commodities would have shifted acres from corn to soybeans, wheat and cotton. "Most of the changes occurring in corn prices are not due to ethanol expansion, but rather due to other forces at work," sums up CARD economist Bruce Babcock. 

For additional information and a link to CARD's study, go to http://www.ethanolrfa.org/exchange/entry/Better-Understanding-the-Ethanol-Corn-Food-Price-Dynamic/