MIT Study: Ethanol Doesn’t Reduce Gasoline Prices

MIT Study: Ethanol Doesn’t Reduce Gasoline Prices
September 12, 2012

Economics professors at the Massachusetts Institute of Technology report ethanol mandates do not lower the price of gasoline, despite claims by the ethanol industry.

‘Implausible Economic Assumptions’

A recently published MIT study debunks the oft-repeated claim that ethanol usage reduces the price of gasoline at the pump. 

The MIT study, “Ethanol Production and Gasoline Prices: A Spurious Correlation,” analyzes and refutes claims by the ethanol industry that ethanol reduced gasoline prices by nearly a dollar per gallon in 2010 and more than a dollar per gallon in 2011. 

“Some proponents of ethanol have argued that ethanol production greatly lowers gasoline prices, with one industry group claiming it reduced gasoline prices by 89 cents in 2010 and $1.09 in 2011,” the MIT study noted. “The estimates have been cited in numerous speeches by Secretary of Agriculture Thomas Vilsack.… We show that these results are driven by implausible economic assumptions and spurious statistical correlations.”

The MIT study points out the largest variable for the price of gasoline is the cost of crude oil. Wholesale gasoline prices go up when the price of a barrel of oil goes up. Ethanol, by contrast, has a minimal impact on the cost of crude oil, the study notes. 

The study further explains that ethanol has 33.3 percent less energy than gasoline, so engines need more of it to power a vehicle for the same distance. 

Correlation, Not Causation

“Put simply, the empirical results merely reflect the fact that ethanol production increased during the sample period whereas the ratio of gasoline [prices] to crude oil prices decreased,” the study explained.

“The claim that ethanol reduces gasoline prices is just silly and is based on the fallacy that correlation equals causation,” said Tom Tanton, president of energy economics consultants T2 & Associates.

Industry Pushes Debunked Claims

The Renewable Fuels Association (RFA) is nevertheless financing a public relations campaign promoting the debunked claim that ethanol has reduced gasoline prices by the amounts repeatedly cited by Vilsack.

“Yet nowhere in the RFA advertisements is the concept of ‘value’ even mentioned,” Tanton explained. “The fact is ethanol, because it only contains about 60 percent of the energy provided by gasoline, does not have the same value, making direct price comparisons meaningless.

He added, “As I testified to Congress in early July, corn-based ethanol may provide some energy security from some geopolitical risks associated with the petroleum market, but it creates a serious weather-related risk. With 25 percent of our corn crop used to make ethanol, and most corn grown only with natural rainfall, our fuel supply has only traded one type of risk for another.

“We’d be more secure if we produced our own vast reserves of petroleum and brought in Canadian, and enjoy lower prices to boot,” Tanton said.

Alyssa Carducci (ad.carducci@gmail.com) writes from Tampa, Florida. 

Internet Info:

Knittel, C. and Smith, A., "Ethanol Production and Gasoline Prices: A Spurious Correlation," July 12, 2012, http://web.mit.edu/knittel/www/papers/knittelsmith_latest.pdf