Ethanol reduced “Pain At the Pump” by more than a dollar a gallon

Written by Jonathan Eisenthal

Last year, when crude oil prices soared, ethanol’s growing presence in the fuel market kept retail gasoline prices in check, according to a study published recently by Iowa State University’s Center for Agricultural and Rural Development.

In 2011, motorists saved an estimated $1.09 per gallon of fuel. Based on the average household consumption of 1,124 gallons of gasoline a year, families averaged a savings of $1,200 compared to what they would have paid without the 14 billion gallons of US-made ethanol that was blended into gasoline.

“Now we have ten percent more fuel in the market, because ethanol serves as a substitute for gasoline,” Sheldon (Xiaodong) Du, assistant professor, Department of Agricultural and Applied Economics at University of Wisconsin, Madison. He said, “Think about supply and demand, the presence of the substitute depresses the price of gasoline.”

Prof. Du wrote the study along with Iowa State University’s Prof. Dermot J. Hayes–it’s an update, using the same methods as a peer-reviewed paper published in 2009 in the journal Energy Policy.

Du was surprised by the extent of the savings, but remains confident of the findings because last year represented three factors that all heightened the market effect of ethanol: there was much higher ethanol production than in previous years,  much higher crude oil prices (price per barrel rose from $80 to $95 dollars per barrel), and perhaps most importantly, crude oil refiners were operating at the very high edge of their capacity–without that ten percent surplus provided by the ethanol, spot price gasoline would have become much more expensive, Du said.

The report also looks over the past decade, during which most of today’s ethanol production capacity has been built, and found an average savings over that entire period of $0.29 cents per gallon, which translates to a savings of $40 billion dollars a year.

Reflecting on these findings, Bob Dinneen, President and CEO of the Renewable Fuels Association said, “While it’s hard to imagine that gas prices could be even higher than they are now, this study clearly underscores that the current pain at the pump would be far worse without ethanol. Because ethanol makes up 10% of our gasoline pool today, it significantly reduces demand for oil and puts downward pressure on gasoline prices. Across the country, ethanol is helping save consumers money. In these times of high unemployment and sky-high gas prices, ethanol is one American-made solution that is providing some relief for battered American families trying to make ends meet.”

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