New University Study: Ethanol Reduced Gas Prices by More than $1 per Gallon in 2011

WASHINGTON, May 15, 2012; America's growing use of domestically-produced ethanol reduced wholesale gasoline prices by an average of $1.09 per gallon in 2011, according to updated research conducted by economics professors at the University of Wisconsin and Iowa State University. The 2011 results, which show a $0.20 per gallon greater price reduction than the $0.89 per gallon impact in 2010, were released today by the Center for Agricultural and Rural Development (CARD). See Full Updated Report(PDF)

RFA's summary of the report:

The new analysis, an update to a 2009 peer-reviewed paper published in Energy Policy by professors Dermot Hayes and Xiaodong Du, also found gasoline prices have been reduced by an average of $0.29 per gallon, or 17%, from 2000-2011 thanks to the growing use of ethanol.

"Growth in US ethanol production has added significantly to the volume of fuel available in the US," said Professor Hayes. "It is as if the US oil refining industry had found a way to extract 10% more gasoline from a barrel of oil. This additional fuel supply has alleviated periodic gasoline shortages that had been caused by limited refinery capacity. It has also changed the relative prices of gasoline and diesel and allowed the US to switch from being a net importer of gasoline to a net exporter. As a result of these changes, US gasoline prices are measurably lower than would otherwise have been the case. This gasoline price impact has been documented in a peer reviewed academic journal and the price dampening effect has increased as ethanol production has grown."

Three primary factors are responsible for ethanol's more robust price benefit at the pump in 2011: higher oil and gasoline prices, higher ethanol inclusion, and ethanol being priced at a larger-than-normal discount to gasoline.

As the economists noted, "Average crude oil price increased from about $80/barrel in 2010 to about $95/barrel in 2011. Correspondingly, average U.S. wholesale gasoline prices have risen 30% from 2010-2011. A wider than normal price differential between ethanol and gasoline prices provides further economic incentives for ethanol production and consumption..."

Based on government data, U.S. households consumed an average of 1,124 gallons in 2011. That means ethanol reduced the average American household's spending on gasoline by more than $1,200 in 2011. Since 2000, the $0.29-per-gallon price dampening impact of greater domestic ethanol use has saved the American economy an average of nearly $40 billion per year. As a result, ethanol has helped the average American household reduce its spending on gasoline by an average of more than $340 per year since 2000.

"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. "Because ethanol makes up 10% of our gasoline pool today, it significantly reduces demand for oil and puts downward pressure on gasoline prices. Across the country, ethanol is helping save consumers money. In these times of high unemployment and sky-high gas prices, ethanol is one American-made solution that is providing some relief for battered American families trying to make ends meet."

Impact of ethanol production on lowering wholesale gasoline
                     prices (in $/gallon)
Average across    East Coast     Midwest   Gulf Coast    Rocky Mountain    West Coast
                           regions
--------------    ----------    -------    ----------    --------------    ----------
Average effect (based on         $0.29           $0.20        $0.45       $0.19           $0.30           $0.23
monthly data of 01/2000-
12/2011)
------------------------    --------------    ----------    -------    ----------    --------------    ----------
Marginal effect (based           $1.09           $0.76        $1.69       $0.73           $1.11           $0.86
only on data of 2011)
------------------------    --------------    ----------    -------    ----------    --------------    ----------
        

NOTE -- East Coast includes: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania, Florida, Georgia, North Carolina, South Carolina, Virginia, and West Virginia. Midwest includes: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Wisconsin. Gulf Coast includes: Alabama, Arkansas, Louisiana, Mississippi, New Mexico, and Texas. Rocky Mountain includes: Colorado, Idaho, Montana, Utah, and Wyoming. West Coast includes: Alaska, Arizona, California, Hawaii, Nevada, Oregon, and Washington.