America’s growing use of ethanol reduced wholesale gasoline prices by an average of $1.09 a gallon in 2011, according to updated research conducted by economics professors at the University of Wisconsin and Iowa State University and released by the Center for Agricultural and Rural Development.
Before you start salivating over that number, however, keep in mind that the research was partially funded by the Renewable Fuels Association, which has an enormous stake in promoting biofuel production. More on that in a moment.
The analysis, an update to a 2009 report published in Energy Policy was authored by Dermot Hayes, professor of economics and of finance at Iowa StateUniversity, and Xiaodong Du, assistant professor in the Department of Agricultural and Applied Economics at the University of Wisconsin. Their analysis determined that gasoline prices have been reduced by an average of 29 cents a gallon, or 17%, from 2000 to 2011 due to the addition of ethanol to motor fuel.
“Ethanol production has added significantly to the volume of fuel available in the U.S.,” said Hayes. “It is as if the U.S. oil refining industry had found a way to extract 10% more gasoline from a barrel of oil.”
The added supply, according to Hayes and Du, helped alleviate periodic gasoline shortages caused by limited refinery capacity. It has also changed the relative prices of gasoline and diesel and allowed U.S. oil companies to become net exporters of gasoline.
That last part is true. For the first time since 1949, the United States exported more gasoline, heating oil and diesel fuel last year than it imported, according to an Energy Department report. To offset soft domestic demand for fuel, U.S. refiners exported 439,000 barrels a day more than were imported the year before. Meanwhile, imports of crude oil and related products fell 11% last year, reaching a level not seen since 1995.
It would be great if those statistics reflected greater U.S. petroleum production, such that oil companies had a surplus to export. If you know anything about the global oil market, though, you know it doesn’t operate on strict supply-and-demand metrics.
Here’s how the Wall Street Journal sized it up: “To boost margins at Gulf Coast refineries, Valero and the other [refineries] are exporting more refined products, both gasoline and higher-priced diesel fuel. The secret to making a profit in refining these days is for refiners to source crude oil domestically [at lower prices] and then sell the refined products to U.S. consumers at [higher] prices based on imported oil.”
Of course, all this manipulation is taking place even as prices at the pump continue to climb, which is what the CARD study links to the economic benefit of adding ethanol to the nation’s gasoline supply.
“Average crude oil price increased from about $80/barrel in 2010 to about $95/barrel in 2011,” the two economists noted. “Correspondingly, average U.S. wholesale gasoline prices have risen 30% from 2010-2011. A wider than normal price differential between ethanol and gasoline prices provides further economic incentives for ethanol production and consumption.”
Leaving aside the unanswered question of why an 18.5% increase in crude oil leads to a 30% increase in wholesale gasoline, none of that data are good for consumers. And as has been documented extensively here and elsewhere, ethanol production—however rosy you might want to paint its alleged net energy value—has an even more negative impact on feed grain prices for livestock producers and thus food prices for consumers.
Inside the numbers
But here’s where the math really goes astray in ethanol’s cost-benefit calculation.
Based on Census Bureau and Energy Information Administration data, 116.7 million U.S. households consumed 131.2 billion gallons of gasoline in 2011, for an average of 1,124 gallons per household. Got that?
According to the CARD analysis, ethanol has had a 29 cents-a-gallon price dampening effect on gasoline prices. Yet the study’s authors conclude: “That means ethanol reduced the average American household’s spending on gasoline by more than $1,200 in 2011.”
Huh?
That’s the line that news stories and the Renewable Fuels Association are touting, despite the fact that two sentences later in the report summary (which is all that 99% of reporters ever read) it stated that, “Since 2000, greater domestic ethanol use has saved the American economy an average of nearly $40 billion per year. As a result, ethanol has helped the average American household reduce its spending on gasoline by an average of more than $340 per year since 2000.”
That’s a little more like it. A buck a day, thanks to ethanol. Not insignificant, but nowhere near the inflated $1,200-a-year figure that appeared higher up in the report.
Of course, none of the high-powered analysis the professors so elaborately detail their report accounts for the one critical factor in this entire ethanol debate: Federal subsidies for ethanol production.
Tax credits for ethanol producers cost the government nearly $6 billion in 2011, according to Department of Energy data—and that doesn’t account for higher consumer prices for meat, dairy and other food products as a result of about 40% of the U.S. corn crop being diverted to ethanol production.
Although the ethanol subsidy program was killed by Congress late last year, the underlying rationale for its existence—reducing U.S. dependence on foreign oil imports—is belied by the record gasoline exports refiners are now rushing to expand.
We need ethanol to bolster our domestic fuel supply, yet the oil companies can’t ship gasoline offshore fast enough.
As a former president famously said, whether we’re talking about gasoline supply and demand or the real economic effect of ethanol production, the math doesn’t work.
The opinions expressed in this commentary are solely those of Dan Murphy, a veteran food-industry journalist and commentator.
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