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Ethanol Production and Gasoline Prices: A Spurious Correlation

Abstract:
Ethanol made from corn comprises 10% of U.S. gasoline, up from 3% in 2003. This dramatic increase was spurred by recent policy initiatives such as the Renewable Fuel Standard and state-level blend mandates and supported by direct subsidies such as the Volumetric Ethanol Excise Tax Credit. Some proponents of ethanol have argued that ethanol production greatly lowers gasoline prices, with one industry group claiming it reduced gasoline prices by 89 cents in 2010 and $1.09 in 2011. The 2010 figure has been cited in numerous speeches by Secretary of Agriculture Thomas Vilsack. We show that these estimates were generated by implausible economic assumptions and spurious statistical correlations. To support this last point, we use the same statistical models and find that ethanol production "decreases" natural gas prices, but "increases" unemployment in both the U.S. and Europe. We even show that ethanol production "increases" the ages of our children. Overall, we see no compelling reason to believe that the effect of ethanol use on gasoline prices has been more than $0.10 per gallon.

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Energy Specializations: Petroleum – Refining and Products; Petroleum – Markets and Prices for Crude Oil and Products; Renewables – Biofuels ; Renewables – Policy and Regulation; Transportation – Policy Issues

JEL Codes:
L1 -
L13 - Oligopoly and Other Imperfect Markets
Q16 - Agricultural R&D; Agricultural Technology; Biofuels; Agricultural Extension Services
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Ethanol Production, Gasoline Prices, Renewable Fuel Standard, U.S. Policy

DOI: 10.5547/01956574.36.1.4

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Published in Volume 36, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.