Is Corn Ethanol Lowering Gas Prices at the Pump?

Despite providing the largest portion of alternative fuel in the US, corn ethanol gets a lot of flack in the circles Cleantech Blog runs in. The usual culprits go something like this: Corn ethanol is heavily subsidized (yes it is). Corn ethanol does not reduce greenhouse gas emissions (sort of, it really, really depends on your assumptions). Corn ethanol contributes to the fertilizer driven “deadzone” in the Gulf of Mexico (maybe, another complicated topic). Corn ethanol drives up the price of food (a topic for another day).

But the main argument for supporting corn ethanol production has always been about energy independence and fuel switching. Enabling a new source of supply into our gasoline supply chain should in theory, put some some downward pressure on gasoline prices at the pump, and keep those energy dollars at home rather than send them overseas.

So the real question is, does it?

A very interesting paper was published at Iowa State last month says yes, US ethanol production (almost all from corn) has reduced gasoline prices at the pump $0.29-$0.40 per gallon, depending on the region. Further, that the reduction came largely at the expense of profits the refining industry would otherwise have made (indicating perhaps that our ethanol production helped US consumers at the pump, but did not impact world oil prices).

In their paper entitled The Impact of Ethanol Production on US and Regional Gasoline Prices and on the Profitability of the US Oil Refinery Industry, authors Xiaodong Xu and Dermot Hayes analyzed the impact on price at the pump and refining profits of adding ethanol to the US gasoline fleets by separating the impact of ethanol from the major variables like gasoline imports, refining capacity, refining utilization rates, hurricanes, market concentration in refining, stocks, and seasonality, that generally affect gasoline price.

I find their $0.29 to $0.40 per gallon results a surprisingly large number, indicating that ethanol production, while providing on average well less than 5% of our gasoline supplies over their study period, could have affected prices at the pump downward to the tune of greater than 2 to 3 times that percentage level. That result is a huge win for ethanol proponents, as it suggests that adding ethanol to the US fleet has significantly benefited consumers (as one would expect), and also suggests that the ethanol subsidy program (at about $0.40 per gallon for 5% of the US gasoline production works out to around a 1 to 2 cent effective tax on gasoline at current levels) may well have paid for itself up to 20x over or more. The studies authors are careful not extrapolate too much from the results, but they are certainly interesting enough to warrant significant further research, and argue a strong case for further corn ethanol support.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of Cleantech.org, and a blogger for CNET’s Greentech blog.

4 replies
  1. Anonymous
    Anonymous says:

    As a trained economist, and now full time investor, I find it difficult to imagine how one would begin to go about "separating the impact of ethanol from the major variables like gasoline imports, refining capacity, refining utilization rates, hurricanes, market concentration in refining, stocks, and seasonality" as the study authors say they did. Perhaps I just have a weak imagination, but I do have extensive background in energy investing and know those variables to be both complex and variable. Other factors, such as seasonal fuel changes are not even mentioned.So, when Xu and Hayes untie that Gordian knot of complex variables and announce an amazingly dis-proportionate impact, Occam's razor suggests that maybe the simplest explanation is that their figures are wrong. If it sounds wrong that "well less" than 5% of the fuel supply (not to mention the fact that the BTU content is a third less) is a tiny tail to wag such a big dog, maybe the simplest answer is that it is wrong. In the investment world, one always has to be wary of confirmation bias, that is, seeing what you want to see rather than what actually exists. With all due respect, a bit more skepticism seems warranted.Mike HAustin TX

  2. Maria Surma Manka
    Maria Surma Manka says:

    Thanks for this information. I've been skeptical of this "corn ethanol is destroying the world" hype that's come up and I've been looking for more in-depth examination of the factors.

  3. mlangner
    mlangner says:

    I gotta agree with Mike H. above. But even if you take the study at face value – 20 x payback? That makes it sound like an investment… which it isn't. If you can take anything away from the study its that the marginal gallon of fuel has leverage because the market supply is too tight. In that case, a 0.02 cent tax sounds almost reasonable – that only $200MM a month until you actually think about the alternatives. What isn't covered in this post at all, because it seems like it's cheering ethanol on, is there is a much smarter way to get that marginal 5% of marginal supply that is attributed to ethanol in this study. One that is much better than the cost of $200MM a month in taxpayer subsidies.1. stop buying oil for the strategic petroleum reserves at a cost of $250-$500MM a month, 2. release about 1/5th of the SPR's daily release capacity into the market for 100 days of summer driving – which would generate about $100 per gallon in profit for the treasury – or at 800K barrels per day about $2.4 Billion in net profit. It would acheive the same market effect as the ethanol… but we'd have money left over to fund continued subsidies for green technologies like solar without cutting Big Oil's or Big Corn's tax subsidies…

  4. Anonymous
    Anonymous says:

    Alright, so I am with you guys but I think you miss some real points that shows the difference between short term thinking and long term thinking. Let me throw a few things out there for those of us that look long term to think about:1) Let me say, you are right, the report was about as wishful as can be.2) Yes, you are right! Cut the darn subsities to the farmers. If they can not make money in this enviornment with corn prices so high and demand for food going even higher, why are the still on the farm. Go get a real job and let someone else run your farm.3) The idea that we can simply open the SPR and let the oil flow is a pipe dream. OK, so we open it up and sell some oil to refineries. The SPR has what 86 day max US consumption in it. If that. So we could do this for a year or two, and then what? We all get a 20 cent per gallon discount at the pump for a few years which equated to what? Maybe a few hundred dollars. The SPR is now empty, we are at the mercy of every terror group and OPEC nation, and our reserves are dry. Not the intended use.4) The high gas prices as distasteful as they are (and beleived me when I say it infuriates me every time I fill up and see a $45- $60 bill) is the only thing that will drive innovation. Money it to be made gentlemen! If we bring down the cost of oil by a few cent per gallon for a few years by opening the SPR, and the money can not be made by developing and bringing to market these new alternative technologies, then we are here once again a few years later, still with high gas prices, a drained SPR and with no alternatives. Long term thinking… Think where you want to be long term. Not tomorrow.5) We need to start demending that our local gas stations start giving us E85. I live in Beaverton OR and my closest gas station that I sould buy E85 at would be a 30 mile trip there and then 30 miles back. Kind of would defeat the purpose of buying cheaper fule that is better for the enviornment if I have to burn my saving and more fule just to get there. I have 15 stations within 3 miles of me all selling gas, but not one that even has thought of selling E85. 6) Then we get the idiots who insist that they sell an alternative product at either the same cost or even a premium to the original becasue they think that people will feel better by buying it. Wrong!!! I feel better when I can buy the alternative product at a discount and save me much more money at the same time. Just today I saw reg gas for $3.93 (lowest) all around me. I went on to PEIX (Pacific Ethanol) site and looked at their financial reports. These guys are selling their product for 2.30 per gallon on average. Where do I get some! Even if they add transportation costs, remarketing costs, etc, and they will sell it to me at a local gas station at 3.00 a gallon, I'm sold! But the infrastructure is just not there yet. We all need to start demanding from BP, Shell, Chevron, Texicon, or whom ever to start giving us that option. Maybe we should spend the farm subsities on retrofitting the older gas stations across the nation instead. If I am throwing it down a rat hole, at least this one is a hole that may benifit me as the average consumer.I could go on forever, and even though we are all complaining about the high prices of oil and the farse of corn based ethanol, think of it as the tax we all pay now, for the promise of cleaner, local, less expensive, more jobs in our contry, and less leverage from those outside the civilized world who would love to mess with us at a drop of a hat. Let's just hope this all works out and we actaully do spend this time to develop the alternative and make it to that point. One thing I can give Bush credit for here is that the man has the guts to point us in the right direction and take the heat for the longer term vision. It is better than short term fixes and whining about it. So let's all do our part to help out. If you have ideas, get involved! Send them to those who may do something about it. Buy the products that support alternatives rather than the same old oil barrons of the middle east. Do any of us remember when flat pannel TV's were $10,000 and the colors were a red/blueish color? I was in Best buy today jest a few short years later, and what do you know? A bigger TV, better quailty, and prices as low as 1/10th of the original price. That is what we get when we all start buying the products. It is called economies of scale.

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