A paper co-authored by an MIT economist and an economist from the University of California at Davis question claims by a previous ethanol study showing the biofuel lowers gasoline by $0.89 to $1.09 per gallon.

MIT's Christopher Knittel says his study is not intended to affect one policy over another, but consequences could arise if policy is based on faulty data.

MIT economist questions ethanol’s role in lower gas pricesKnittel and his co-author, economist Aaron Smith of the University of California at Davis, discussed the topic in a paper published in an upcoming issue of The Energy Journal. Their analysis challenged work by Dermot Hayes, an Iowa State University economist, showing the effect of ethanol on reducing the price of gasoline.

"Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment," Knittel says.

According to ScienceDaily Knittel doesn’t negate ethanol’s presence in the marketplace, but says cost savings aren’t entirely proven.

  Knittel analyzes a previous claim by considering the relative value of gasoline compared to oil, called the “crack ratio.” According to ScienceDaily 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.

Knittel and Smith argue the claim showing ethanol’s role in lowering gas prices was evaluated at a time when both the percentage of ethanol in gasoline and oil prices were increasing and the savings correlated with the declining crack ration, but was not the cause.

After reading Knittel and Smith’s paper, Scott Irwin, an economist at the University of Illinois at Urbana-Champaign, says the authors’ argument is “convincing and compelling.”

"A case can be made that it can be a positive few cents," Irwin says, adding that "reasonable arguments can be made on either side of zero" regarding ethanol's price impact. In either case, Irwin says, his view is that the effect is currently a small one.

Read more here.

A previous commentary from energy economist Philip K. Verleger estimated ethanol saved consumers between $0.50 and $1.50 per gallon of gas.