Economic studies paint opposing pictures in gas price wars

Both sides in the debate over government biofuels support are looking to bolster their arguments with numbers, as new, warring economic studies present differing figures on the role that ethanol production plays in gasoline pricing.

A paper by two economists published by the Center for Agricultural and Rural Development (CARD) at Iowa State University argues that ethanol production has reduced wholesale gasoline prices by 25 cents per gallon on average over the past 10 years, with recent price impacts in certain markets reducing the cost by as much as $1.37 per gallon.

That study -- funded by the ethanol industry group Renewable Fuels Association -- also warned that in the unlikely scenario that domestic ethanol production should be quickly and completely stopped, gas prices could skyrocket.

But a competing study by the Energy Policy Research Foundation Inc. (EPR Inc.), an energy economics group supported by petroleum and energy companies, argued in a paper attacking the federal renewable fuel standard that rising corn costs make ethanol more expensive than gasoline and increase the overall cost of fuel for consumers.

The two studies come as lawmakers on Capitol Hill look at federal biofuel subsidies with an increasingly skeptical eye.


The federal government will pay about $6 billion this year to blenders of corn ethanol through the Volumetric Ethanol Excise Tax Credit, or VEETC, even as mandates for increased production of advanced fuels like ethanol made from agricultural wastes and non-food energy crops have so far failed to produce commercially successful business models (E&E Daily, April 14).

The new CARD paper argues that under federal mandates that have led ethanol to reach a nearly 10 percent threshold in commercially sold gasoline, the fuel has reduced demand for petroleum-derived fuel and thus caused prices to remain lower.

Over the past 10 years, that effect has averaged a 39-cent cost reduction in the Midwest, where ethanol use is particularly high, and 16 cents per gallon on the East Coast, the researchers said.

But looking just at 2010 data, as ethanol has reached the highest market penetration rate, they said ethanol has averaged an 89-cent per gallon reduction in wholesale gasoline prices, with a 58-cent-per-gallon reduction on the East Coast and $1.37-per-gallon reduction in the Midwest.

The study also looked at what would happen if domestic ethanol production suddenly stopped -- a specter that could be tied in observers' minds with a sudden end to the VEETC and other federal ethanol supports, which has been advocated by some critics, including several members of Congress.

In reality, even an immediate end to ethanol supports would not shut off the spigot entirely as it is an important fuel additive that improves how fuel burns in vehicle engines.

The impact of suddenly eliminating ethanol production would have severe short-run consequences, the economists said, because domestic gasoline refining capacity is in high demand. Thus in the short term, before price pressure triggered market adjustments, such a possibility could lead to wholesale gasoline prices going up between 41 percent and 92 percent, depending on producer and consumer price sensitivity.

In an email, report author Xiaodong (Sheldon) Du of the University of Wisconsin, Madison, said such a sudden shortfall of ethanol represents "the worst case scenario."

"Given current high utilization of refinery capacity and oil consumption habits, the results indicate that we won't have much room for demand and supply to adjust if we drop a significant amount of ethanol from the market," Du said.

But the Renewable Fuels Association was nonetheless quick to pick up on the bottom line.

"This study confirms that ethanol is playing a tremendously important role in holding down volatile gasoline prices, which are currently inching closer to all-time record highs," said group President Bob Dinneen. "As rising oil prices are contributing to higher retail costs for everything from gas to food to clothing, ethanol is clearly providing some real relief for American families."

The group said that combined with Energy Department data showing that American drivers used 138 billion gallons per year over the study period, it shows that annual ethanol-related savings over that time period averaged $34.5 billion. That amount far exceeds the federal subsidies for biofuels.

From the other side, opposing results

Economic analyses can depend heavily on how the question is set up, though, and the new oil and gas group report comes to very different conclusions.

That study considered the spiraling cost of corn feedstocks for ethanol and concluded that will cause ethanol to be priced higher than gasoline going forward.

The paper argues that ethanol has not served as a price pressure release valve for gasoline at the pump as crude oil prices have skyrocketed, because corn feedstock costs have more than doubled over the past 10 months.

This means that when adjusted for comparison on an energy equivalent basis, ethanol costs more than gasoline, the paper argues.

Moreover, the ethanol industry is close to hitting the "blend wall" created by the current cap of 10 percent ethanol that can be blended into vehicle fuel, they said, posing another challenge for the industry.

Both of those points are debatable, though. While corn prices have gone up in recent months, a doubling in feedstock costs does not necessarily cause as dramatic an increase in cost for the final product -- and with petroleum-derived gasoline costs going up, the overall price point at which ethanol must compete is an upward-moving target.

Ethanol and petroleum-based gasoline costs both depend on a range of commodity prices, but generally speaking, ethanol becomes more attractive at the pump when oil prices rise, experts say.

Also, ethanol insiders have said for months that they have already reached the blend wall and that constraint, not price, is currently the biggest damper on further ethanol sales.

That issue is a major impetus behind the industry's push for federal help in moving the domestic fueling infrastructure toward higher-ethanol blends ranging from E15 (15 percent ethanol) up to E85 (85 percent ethanol), which would help to sell more of the gasoline alternative.

The EPRI Inc. study argues that given the high cost of corn, higher-ethanol blends will not be accepted by consumers without significant price discounts being offered upstream in the supply chain in order to meet federal mandates.

Further, they said, the costs to taxpayers of programs to reduce petroleum imports outweigh the resultant price benefits by nearly 3 to 1.

Click here to read the CARD study.

Click here to read the EPRI Inc. study.

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