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Ethanol not driving gasoline price reduction

Ethanol not driving gasoline price reduction
Christopher Knittel

Blending ethanol into our gasoline might play an important role in reducing the emissions of our vehicles, but it doesn’t really play a part in reducing gas prices.

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Christopher Knittel, an economist with the Massachusetts Institute of technology, has found that – whatever the benefits or the drawbacks of ethanol – the price of gasoline is not substantially affected by the volume of its ethanol content.

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“The point... 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,” says Mr. Knittel, the William Barton Rogers Professor of Energy and a professor of applied economics at the M.I.T. Sloan School of Management.

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Mr. Kittnel’s work looked at an earlier study which claimed that widespread use of ethanol has reduced the wholesale cost of gasoline by $0.89 to $1.09 per gallon.

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Along with economist Aaron Smith of the University of California at Davis, Mr. Knittel is contesting that assertion in a paper which is forthcoming in The Energy Journal.

The two believe the prior study is problematic, as it involves what energy economists call the “crack ratio”.

The crack ratio is effectively the price of gasoline divided by the price of oil. This is something that energy analysts use to understand the relative value of gasoline compared to oil. The higher the crack ratio, the more expensive gasoline is.

If oil prices double, gasoline prices will not necessarily do so. But in general, when oil prices go up, the crack ratio itself falls.

In addition, when we’re talking about ethanol-blend gasoline, if ethanol is the cheap component of gasoline production, its increasing presence in the fuel mix might be seen as a decreasing crack ratio.

The previous work focused on time periods when oil prices rose, and the percentage of ethanol in gasoline also rose.

Mr. Knittel and Mr. Smith assert that the increasing proportion of ethanol in gasoline merely correlated with the declining crack ratio and didn’t contribute to it in any causal sense. They believe that it’s the changing oil prices that changed the crack ratio and that, when those prices are accounted, the apparent effect of ethanol “simply goes away.”

The previous work also claimed if ethanol production came to an immediate halt, gasoline prices would rise by 41 to 92 percent, a claim they also dispute.

“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,” Mr. Knittel says. “But certainly within a month, increases in imports would relax or reduce that price impact.”

According to Mr. Knittel, their study is not intended to influence policy on ethanol use, but he suggests that ethanol backers need to keep examining its value.

“Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment,” Mr. Knittel says. – EcoSeed Staff

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