Ethanol Output Linked to Gas Price Drop

The 13.9 billion gallons (52.5 billion L) of ethanol added to the U.S. fuel supply last year reduced the price of gasoline by $1.09 a gallon, researchers at the University of Wisconsin and Iowa State University say.

The Center of Agricultural and Rural Development at Iowa State says regular gasoline averaged $3.52 a gallon in 2011 and without the ethanol, the price would have been about $4.61.

A new report from the center says the average American household used 1,124 gallons (4,248 L) of gasoline in 2011, meaning ethanol cut the gasoline expense by more than $1,225.

“The results indicate that over the period of January 2000 to December 2011, the growth in ethanol production reduced wholesale gasoline prices by 29 cents a gallon on average across all regions,” the researchers say in a statement.

The Midwest region experienced the greatest price reduction of $0.45 a gallon, while the East Coast, West Coast and Gulf Coast experienced reductions of about $0.20 a gallon.

“Based on the data of 2011 only, the marginal impacts on gasoline prices are found to be substantially higher given the increasing ethanol production and higher crude oil prices,” the researchers say.

“The average effect across all regions increases to $1.09/gallon and the regional impact ranges from 73 cents a gallon in the Gulf Coast to $1.69/gallon in the Midwest.”

Researcher Xiaodong Du, an assistant professor in the Department of Agricultural and Applied Economics, University of Wisconsin-Madison, and Dermot Hayes, a professor of economics and finance at Iowa State, say the 2011 results appear large because with rising crude-oil prices and expanding ethanol production, the marginal impact of ethanol growth on gasoline prices becomes increasingly pronounced.

The surge in ethanol production in recent years essentially has added 10% to the volume of fuel available for gasoline-powered cars and in so doing, they say, it has allowed the U.S. to switch from being a major importer of finished gasoline to a major exporter of both gasoline and ethanol.

“Countries that switch trade patterns in this way will see dramatic price impacts, because internal prices switch from world prices plus transportation costs to world prices minus transportation costs,” their report says.

“In the early period, the U.S. gasoline price had to be equal to the (European Union) gasoline price plus the costs of transporting the gasoline from the EU to the U.S. Now that ethanol has allowed the U.S. to reverse this trade pattern, U.S. prices are lower than EU gasoline prices by an amount equal to transportation costs.

“In this context, a $1.09-per-gallon marginal impact for 2011 seems reasonable.”