MIT economist questions ethanol’s role in lower gas prices

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A paper co-authored by an MIT economist and an economist from the University of California at Davis question claims by a previous ethanol study showing the biofuel lowers gasoline by $0.89 to $1.09 per gallon.

MIT's Christopher Knittel says his study is not intended to affect one policy over another, but consequences could arise if policy is based on faulty data.

Corn production Knittel and his co-author, economist Aaron Smith of the University of California at Davis, discussed the topic in a paper published in an upcoming issue of The Energy Journal. Their analysis challenged work by Dermot Hayes, an Iowa State University economist, showing the effect of ethanol on reducing the price of gasoline.

"Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment," Knittel says.

According to ScienceDaily Knittel doesn’t negate ethanol’s presence in the marketplace, but says cost savings aren’t entirely proven.

  Knittel analyzes a previous claim by considering the relative value of gasoline compared to oil, called the “crack ratio.” According to ScienceDaily the higher the crack ratio, the more expensive gasoline is in relative terms. If ethanol were a notably cheap component of gasoline production, its increasing presence in the fuel mix might reveal itself in the form of a decreasing crack ratio.

Knittel and Smith argue the claim showing ethanol’s role in lowering gas prices was evaluated at a time when both the percentage of ethanol in gasoline and oil prices were increasing and the savings correlated with the declining crack ration, but was not the cause.

After reading Knittel and Smith’s paper, Scott Irwin, an economist at the University of Illinois at Urbana-Champaign, says the authors’ argument is “convincing and compelling.”

"A case can be made that it can be a positive few cents," Irwin says, adding that "reasonable arguments can be made on either side of zero" regarding ethanol's price impact. In either case, Irwin says, his view is that the effect is currently a small one.

Read more here.

A previous commentary from energy economist Philip K. Verleger estimated ethanol saved consumers between $0.50 and $1.50 per gallon of gas.

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Earl Richards    
Montreal  |  October, 16, 2013 at 07:06 AM

To avoid the gasoline price, rip-off, plug your Tesla S, electric car into your household, solar array.

NE  |  October, 16, 2013 at 08:52 AM

Big oil will find someone to tell their side of the story . A small grant will always work

Brooks Lyman    
MA  |  October, 18, 2013 at 12:08 AM

Earl, if you can afford a Tesla S, you have no business worrying about the price of gasoline. In addition, it's my understanding that the addition of ethanol to gasoline reduces the fuel economy of the engines it's burned in, so that needs to be figured into any honest evaluation of the economics of adding it to gasoline.

a baer    
October, 16, 2013 at 08:55 AM

Why don't we try a real novel approach and get rid of all mandates and let the market place determine what the true value of ethanol is compared to conventional fuel.

Kansas  |  October, 16, 2013 at 09:18 AM

a baer…. That would work if EPA would fix the barriers of fuel blending along with giving options like blender pumps access to the market. EPA will never cross path with big oil and to prove this, let’s look at EPA’s 2007 Mobile Source Air Toxic ruling. EPA used $17 dollar oil, $6 dollar corn and that it took 2 parts ethanol to replace one part aromatics for octane. Today we have just over $100 a barrel for crude, corn dropping to mid-$4 and EPA got the octane totally backwards. The blending value for ethanol is 120 octane and aromatics is around 104. This study like many others have the summary and conclusions already written before the data is fully collected. This happens on both sides of the issues I think we should think about sustainability in farming and don’t forget that $2 corn is on the ground in Brazil.

Colorado  |  October, 16, 2013 at 07:33 PM

Yes! and Yes! Never should have been a mandate. When any big, uncontrolled branch of the government, specifically the EPA and the Department of Food Stamps, sorry USDA, decides to create a demand for corn, it raised the price of every feed ingredient and by-product 200-300% since 2007, wiping out decades of equity built up by families in all segments of animal agriculture.

NE  |  October, 16, 2013 at 10:57 PM

William .I am sure you mean family farmers like Smithfield Cargill Seaboard who took over the hog buisness when Republican freedom to farm lowered the price of corn to $1.50 or less .To say nothing of the Chinese ! .5 million sows and Brazils JBS bigest beef packer and feeder in the world .Think about who your real friends are .

Colorado  |  October, 16, 2013 at 11:48 PM

Mel, Please read it again. It's about the effect of the mandate on "family" animal agriculture operations and the equity lost due specifically to the mandate (RFS).

October, 17, 2013 at 06:49 AM

$4 bushel corn means $1.50/gallon ethanol vs. $2.90/gallon RBOB raw gasoline. Maybe now we'll see if ethanol can reduce the price of fuel to the consumer. It depends on whether the fuel distributors and retailers can resist the impulse to make $1.40/gallon pure profit on ethanol or pass some of the savings on to the consumers. You livestock farmers just cannot understand that ethanol is the reason why your grass is now worth $1.80 as feeder calves instead of $0.40. Hay farmers here can now get $150/ton vs the $25/ton previously. Do you really want to go back to $1.80 corn and $0.50 fat cattle?

NE  |  October, 18, 2013 at 06:49 PM

Good point Rick ; I am sure this web site searchs high and low to find anti ethanol stories ,just like Drudge and Fox News.I am not sure what they will print if the $1.60 ethanol gets in the fuel stations .Hats off to the Cenex station in Windom MN. for 4 Blender Pumps in a row giving consumers a choice at the pump.That takes farm loyalty.

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