Gasoline Prices Unaffected By Ethanol And Biofuels

Lee Rannals for – Your Universe Online
Contrary to popular belief, biofuels like ethanol may not help lower the price at the pump, according to findings reported in The Energy Journal.
Over the past couple of years, some people have claimed that the widespread use of ethanol has reduced the wholesale cost of gasoline by $0.89 to $1.09 per gallon. However, Christopher Knittel, an MIT economist and co-author of the new paper, says this claim is unfounded.
“The point of our paper is not to say that ethanol doesn’t have a place in the marketplace, but it’s more that the facts should drive this discussion,” Knittel, the William Barton Rogers Professor of Energy and a professor of applied economics at the MIT Sloan School of Management, said in a recent statement.
The majority of ethanol sold in the US is made from corn, and currently it constitutes 10 percent of US gasoline, up from 3 percent in 2003. A previous study claimed that this biofuel helped lower gas prices, but the latest research shows that this study was problematic due to the “crack ratio.”
The crack ratio is what energy analysts use to understand the relative value of gasoline compared to oil. 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.
Researchers say that the increased proportion of ethanol in gasoline merely correlated with the declining crack ratio, and did not contribute in any casual sense. Instead, the team believes that changing oil prices have driven the change in the crack ratio, and that when those prices are accounted for, the apparent effect of ethanol goes away.
The past study said if ethanol production came to an immediate halt then gas prices would rise by 41 to 92 percent. However, Knittel said that this scenario isn’t as gruesome to the wallet as the previous authors portrayed.
“In the very short run, if ethanol vanished tomorrow, we would be scrambling to find fuel to cover that for a week, or less than a month,” Knittel says. “But certainly within a month, increases in imports would relax or reduce that price impact.”
He said policy decisions about gasoline production are driven by a complex series of political factors, and that his study was not intended to suggest any policy preference on his part. However, he added that even ethanol backers in policy debates have reason to keep examining its value.
“Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment,” Knittel said.

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