Ethanol production has depressed national wholesale gasoline prices in the US by 14 cents/gal and US refinery profit margins by $1.33/bbl over the period of January 1995 to March 2008, according to work by economics researchers at Iowa State University.
Those figures correspond to an 8% reduction in the case of gasoline prices, and a 10.6% reduction for refinery margins.
The researchers' paper is currently in press in the journal Energy Policy. An earlier working paper by the same authors appears on their departmental website.
The corresponding author, Xiaodong Du, described the magnitude of ethanol's impact on gasoline price as "surprising" and "much higher than we expected," because over the study period, ethanol replaced less than 5% of the nation's total gasoline consumption. In their paper, Du and fellow author Dermot Hayes also expressed their surprise at the size of the effect because the price and margin depression figures are averages assessed over a long study period. Averages are a measure of central tendency, and so the effects seen in a given year may be more than those average figures might suggest.
Du told The Barrel the working paper had generated many responses from consultants, government agencies, the media and other researchers, and had been downloaded more than 6,000 times since becoming available.
The authors believed their study to be unique because unlike "much of the existing analyses and public debate about ethanol support policy," they looked at the effect of burgeoning ethanol production on national and regional gasoline prices. In their study they controlled for other factors influencing gasoline prices over the study period, such as the tightness of crude and refined product markets, changes in refinery capacity, market concentration in the refining industry, levels of gasoline imports, and unexpected disruptions in supply (e.g., hurricanes).
The substitution effect of ethanol on gasoline prices could also be seen to varying degrees among the US regions defined as Petroleum Administration for Defense Districts (PADDs) over the same study period. In their regional analysis, the authors looked at retail gasoline prices rather than wholesale prices. The price depression effect was greatest on Midwest gasoline prices at 28 cents/gal. The East Coast and the West Coast regions were next in line at 26 cents/gal and 23 cents/gal, respectively. Gulf Coast prices were down by 20 cents/gal thanks to bio-ethanol production, while the Rocky Mountains region was the least affected at 7 cents/gal, "presumably because of this region's comparatively low total ethanol and gasoline consumption," the authors said.
Du said the research could be used to help estimate the impact of future ethanol production on gasoline prices.
The work also put figures on welfare changes associated with the use of ethanol as a substitute for gasoline.
Du is also lead author on a recent ethanol working paper on the volatility interdependence between crude oil and agricultural commodity markets.
Sarah, I am surprised that economics researchers would themselves be surprised that a 5% displacement of market share would have such an impact on the market. Imagine, for example, if the world suddenly produced a crude substitute that displaced 5% of the world's crude consumption. If we consider the world is consuming about 84 million b/d, that would be 4.2 million b/d. That would have an enormous impact on the price of crude. So the 5% is actually pretty big, and I think you see it even now, in that the "strong" gasoline margins are nothing compared to the diesel margins of last year.