New Study Shows Ethanol Impact on Gas Prices

Ethanol is saving most users 29 cents per gallon at the pump, according to a new report.

Published on: May 16, 2012

A 2009 study showed that ethanol in the system is saving consumers money on every gallon of gas they buy. An update of the study shows that the average saved nationwide is 29 cents, but here's where it gets interesting. If you look at marginal differences in gas prices, which take into effect the price of crude and other factors, the savings rises to $1.09 per gallon.

The key difference is that the United States has moved from being an importer of gasoline to being a net exporter, which means the price we pay no longer carries the shipping charge it once did. In the study, conducted by Ziaodong Du and Dermot Hayes, is an update of the 2009 study. Du is now at the University of Wisconsin-Madison, Hayes is a professor of economics at Iowa State University.

Ethanol is saving most uses 29 cents per gallon at the pump, according to a new report.
Ethanol is saving most uses 29 cents per gallon at the pump, according to a new report.

Hayes, during a conference call Tuesday, notes that the price of gasoline is no longer directly related to the price of crude oil, while diesel price are more closely tied together. Farmers who used to watch diesel prices that were lower than gas prices will remember that relationship. But more recently, the pool of ethanol available in the U.S. market has changed the economics.

"Ethanol has had a big effect on gasoline prices, but no effect on diesel," Hayes says. "In the late 1990s, gasoline sold at a premium." The key change is that ethanol takes up about 10% of the gasoline consumed today.

Another issue Hayes pointed out, that has been an impact of ethanol in the market is an end to price spikes in gasoline when the industry approached refinery capacity. "We have not seen spikes due to refining capacity issues due [ethanol availability]."

Essentially there's 10% more "gasoline" in the system from ethanol and that is holding the price down, Hayes explains.

You'll here the $1.09 per gallon number quoted a lot, and that's more complicated to explain, but it is a marginal price difference number that takes into account that price spike risk, the link between crude prices and gasoline prices and other factors. However, the 29 cents is impacting gasoline prices nationwide on a direct basis.

Adds Bob Dineen, head of the Renewable Fuels Association, which paid for this update to the 2009 report: "It's important for Congress and the public to understand how much a growing and evolving ethanol industry impacts the pocket books. The 13.5 billion gallons of ethanol produced saves consumers at the pump."