Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Ethanol not a major factor in reducing gas prices

11.10.2013
MIT economist finds that biofuels, contrary to claims, do not meaningfully affect what drivers pay at the pump.

If you have stopped at a gas station recently, there is a good chance your auto has consumed fuel with ethanol blended into it. Yet the price of gasoline is not substantially affected by the volume of its ethanol content, according to a paper co-authored by an MIT economist.

The study seeks to rebut the claim, broadly aired over the past couple of years, that widespread use of ethanol has reduced the wholesale cost of gasoline by $0.89 to $1.09 per gallon.

Whatever the benefits or drawbacks of ethanol, MIT’s Christopher Knittel says, price issues are not among them right now.

“The point of our paper 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 Knittel, the William Barton Rogers Professor of Energy and a professor of applied economics at the MIT Sloan School of Management.

The 10 percent solution?

The vast majority of ethanol sold in the United States is made from corn. It now constitutes 10 percent of U.S. gasoline, up from 3 percent in 2003.

It is another matter, however, whether that increase in ethanol content produces serious savings at the pump, as some claim. Knittel and his co-author, economist Aaron Smith of the University of California at Davis, contest such an assertion in their paper, which is forthcoming in The Energy Journal, a peer-reviewed publication in the field.

The claim that ethanol lowers prices derives from a previous study on the issue, which Knittel and Smith believe is problematic. That prior work involves what energy economists call the “crack ratio,” which is effectively the price of gasoline divided by the price of oil.

The crack ratio is something energy analysts can use to understand the relative value of gasoline compared to oil: 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.

So while gasoline is made primarily from oil, there are other elements that figure into the cost of refining gasoline. Thus if oil prices double, Knittel points out, gasoline prices do not necessarily double. But in general, when oil prices — as the denominator of this fraction — go up, the crack ratio itself falls.

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

But Knittel and Smith assert that the increased proportion of ethanol in gasoline merely correlated with the declining crack ratio, and did not contribute to it in any causal sense. Instead, they think that changing oil prices drove the change in the crack ratio, and that when those prices are accounted for, the apparent effect of ethanol “simply goes away,” as Knittel says.

To further illustrate that the previous study was touting a correlation, not a causal relationship, Knittel and Smith conducted what are known in economics literature as “antitests” of that study’s model. By inserting unconnected dependent variables into the model, they found that the model also produced a strong correlation between ethanol content in gasoline and, for instance, U.S. employment figures — although the latter are clearly unrelated to the composition of gasoline.

The previous work also claimed that if ethanol production came to an immediate halt, gasoline prices would rise by 41 to 92 percent. But Knittel does not think that estimate would bear out in such a scenario.

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

Informing the debate

The differing assessments of ethanol’s impact have garnered notice among economists and energy policy analysts. Scott Irwin, an economist at the University of Illinois at Urbana-Champaign who has read the paper, calls it a “convincing and compelling” rebuttal to the idea that expanding ethanol content in gasoline drastically lowers prices.

“The paper dispensed once and for all with that conclusion,” Irwin says. Still, he adds, there remains an open debate about the marginal effects of ethanol content in gasoline, and more empirical work on the subject would be useful.

“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.

Knittel has posted, on his MIT Sloan web page, a multipart exchange between himself and Dermot Hayes, an Iowa State University economist who is a co-author of the prior work. After an initial finding that ethanol reduced gasoline prices by $0.25 per gallon, Hayes and a co-author produced follow-up studies, examining about a decade after 2000, and arrived at the figures of $0.89 and $1.09 per gallon, which gained wider public traction.

Knittel acknowledges that policy decisions about gasoline production are driven by a complex series of political factors, and says his study is not intended to directly convey any policy preferences on his part. Still, he suggests that even ethanol backers in policy debates have reason to keep examining its value.

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

Sarah McDonnell | EurekAlert!
Further information:
http://www.mit.edu

Further reports about: Biofuels Ethanol oil prices price of gasoline

More articles from Studies and Analyses:

nachricht Novel study underscores microbial individuality
13.12.2019 | Bigelow Laboratory for Ocean Sciences

nachricht TU Dresden biologists examine sperm quality on the basis of their metabolism
29.11.2019 | Technische Universität Dresden

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Miniature double glazing: Material developed which is heat-insulating and heat-conducting at the same time

Styrofoam or copper - both materials have very different properties with regard to their ability to conduct heat. Scientists at the Max Planck Institute for Polymer Research (MPI-P) in Mainz and the University of Bayreuth have now jointly developed and characterized a novel, extremely thin and transparent material that has different thermal conduction properties depending on the direction. While it can conduct heat extremely well in one direction, it shows good thermal insulation in the other direction.

Thermal insulation and thermal conduction play a crucial role in our everyday lives - from computer processors, where it is important to dissipate heat as...

Im Focus: Fraunhofer IAF establishes an application laboratory for quantum sensors

In order to advance the transfer of research developments from the field of quantum sensor technology into industrial applications, an application laboratory is being established at Fraunhofer IAF. This will enable interested companies and especially regional SMEs and start-ups to evaluate the innovation potential of quantum sensors for their specific requirements. Both the state of Baden-Württemberg and the Fraunhofer-Gesellschaft are supporting the four-year project with one million euros each.

The application laboratory is being set up as part of the Fraunhofer lighthouse project »QMag«, short for quantum magnetometry. In this project, researchers...

Im Focus: How Cells Assemble Their Skeleton

Researchers study the formation of microtubules

Microtubules, filamentous structures within the cell, are required for many important processes, including cell division and intracellular transport. A...

Im Focus: World Premiere in Zurich: Machine keeps human livers alive for one week outside of the body

Researchers from the University Hospital Zurich, ETH Zurich, Wyss Zurich and the University of Zurich have developed a machine that repairs injured human livers and keep them alive outside the body for one week. This breakthrough may increase the number of available organs for transplantation saving many lives of patients with severe liver diseases or cancer.

Until now, livers could be stored safely outside the body for only a few hours. With the novel perfusion technology, livers - and even injured livers - can now...

Im Focus: SuperTIGER on its second prowl -- 130,000 feet above Antarctica

A balloon-borne scientific instrument designed to study the origin of cosmic rays is taking its second turn high above the continent of Antarctica three and a half weeks after its launch.

SuperTIGER (Super Trans-Iron Galactic Element Recorder) is designed to measure the rare, heavy elements in cosmic rays that hold clues about their origins...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

11th Advanced Battery Power Conference, March 24-25, 2020 in Münster/Germany

16.01.2020 | Event News

Laser Colloquium Hydrogen LKH2: fast and reliable fuel cell manufacturing

15.01.2020 | Event News

„Advanced Battery Power“- Conference, Contributions are welcome!

07.01.2020 | Event News

 
Latest News

A new 'cool' blue

17.01.2020 | Life Sciences

EU-project SONAR: Better batteries for electricity from renewable energy sources

17.01.2020 | Power and Electrical Engineering

Neuromuscular organoid: It’s contracting!

17.01.2020 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>