The $6 Gasoline That Almost Was

Mad as heck about $5 gasoline? According to new research from Iowa State, the price could have hit $6 per gallon, if the US had not had its ethanol supply.

A landmark 2009 study, conducted by researchers at Iowa State’s Center for Agricultural and Rural Development, and updated this week for impacts through 2011, found that US ethanol production reduced wholesale gasoline prices by an average of $1.09 per gallon, in 2011.

Yep, that’s $143 billion saved for US public last year, which has seen gasoline prices sharply rising for years – a savings that averages $1,225 per year, per US household.

But, more starkly, let’s talk about pain at the pump.

That cost of gasoline, which famously reached $5.39 per gallon this past year at a DC gasoline station near the White House, could have topped out at nearly $6.50 per gallon, using the research findings, adding a few pennies for the added margin and percentage-based taxes.

In the ethanol-rich Midwest, the regional impacts are even more stark. The researchers found that E10 ethanol reduced gasoline prices by an average of $1.69 per gallon. Now, gasoline prices in Chicago this spring were topping $4.67 per gallon – imagine a positively European $6.30 per gallon for gasoline, Chicagolanders.

Yikes.

Now, it stands to reason that E10 ethanol would be cheaper than gasoline, because mileage is reduced by 2.5-3.0 percent, owing to ethanol’s lower energy density. But that accounts for around a 10 cent differential, owing to reduced mileage. The other buck in that $1.09 in savings, that’s kept by consumers, and stays in the communities they live in, rebuilding jobs and local economies.

The visibility problem of avoided cost

It really is a tough thing, getting someone excited about all the savings they achieved because of something that didn’t happen – in this case, even higher gasoline prices. It’s like trying to get someone really, really excited about a colonoscopy. When things are bad, its hard to rally the troops with “heck, it could be worse, boys and girls,”

But consider what the price of sugar would look like, for example, if there were no Splenda, Sweet & Low or Equal out there. Consider how many laws there are in place to prevent price gouging during weather emergencies – precisely because we know what happens to the price of water, when its on offer in the middle of a desert.

How did the savings happen?

“Growth in US ethanol production has added significantly to the volume of fuel available in the US,” said Professor Dermot Hayes, one of the authors of the updated report, which you can download here.

“It is as if the US oil refining industry had found a way to extract 10% more gasoline from a barrel of oil,” Hayes added. “This additional fuel supply has alleviated periodic gasoline shortages that had been caused by limited refinery capacity.  It has also changed the relative prices of gasoline and diesel and allowed the US to switch from being a net importer of gasoline to a net exporter. As a result of these changes, US gasoline prices are measurably lower than would otherwise have been the case. This gasoline price impact has been documented in a peer reviewed academic journal and the price dampening effect has increased as ethanol production has grown. This impact is greatest in the regions of the country where ethanol penetration is greatest.”

The impact of ethanol on gasoline prices is intensifying. Over the period from 2000 through 2011, the authors found that E10 ethanol reduced prices by an average of $0.29 per year, with the impact rising to $0.89 per year by 2009.

Why the sharp impacts in the 2009-2012 period? Three primary factors are responsible for ethanol’s more robust price benefit at the pump in 2011:  higher oil and gasoline prices, higher ethanol inclusion, and ethanol being priced at a larger-than-normal discount to gasoline.

As the economists noted, “Average crude oil price increased from about $80/barrel in 2010 to about $95/barrel in 2011. 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…”

Reaction from the Renewable Fuels Association

“While it’s hard to imagine that gas prices could be even higher than they are now, this study clearly underscores that the current pain at the pump would be far worse without ethanol,” said Bob Dinneen, President and CEO of the Renewable Fuels Association, which helped fund the research.  “Because ethanol makes up 10% of our gasoline pool today, it significantly reduces demand for oil and puts downward pressure on gas prices. From coast to coast and border to border, ethanol is helping save consumers money.  In these times of high unemployment and sky-high gas prices, ethanol is one America-made solution that is providing some respite for battered American families trying to make ends meet.”

Reaction from the usual suspects

Radio silence from the “drill, baby, drill” crowd, who are presumably loathe to try and explain how a return to an “oil and oil alone” policy is worth $1.09 per gallon to the average consumer. And $143 billion, annually, to the makers of the incumbent energy, which presumably explains why they are so mad about ethanol in the first place.

Elvis has left the building: The multiplier effect

Had ethanol not been around, the $143 billion would have, generally speaking, gone offshore, in higher payments for imported fuels needed to make up for the energy shortfall. Now, according to CreateJobsforUSA.org, every $3000 in equity invested in small business via their programs results in one added job. Is that true? Hard to say, no matter what the figure is, $143 billion residing in domestic banks, invested in local communities, is going to produce one heck of a lot of economic activity. It’s the multiplier effect, and the halo effect, at work.

The Bottom Line

Heartening news for biofuels stakeholders, who can and ought to trumpet the results. It is sometimes a difficult sell – persuading the public to feel good about an avoided cost. But its worth an effort from the friends of alternative fuels, who have something really important to crow about – how much alternative fuels save the consumer from the kind of prices that monopolists offer.

Someone ought to make up an “I Saved You $1220 last year. Ask me How.” T-shirt, and ethanol producers ought to wear them. It’s a story they ought to be proud to tell.