Tuesday, September 16, 2008

blog post: Is Corn Ethanol Lowering Gas Prices at the Pump?

THURSDAY, MAY 15, 2008

Is Corn Ethanol Lowering Gas Prices at the Pump?
Despite providing the largest portion of alternative fuel in the US,
corn ethanol gets a lot of flack in the circles Cleantech Blog runs
in. The usual culprits go something like this: Corn ethanol is heavily
subsidized (yes it is). Corn ethanol does not reduce greenhouse gas
emissions (sort of, it really, really depends on your assumptions).
Corn ethanol contributes to the fertilizer driven "deadzone" in the
Gulf of Mexico (maybe, another complicated topic). Corn ethanol drives
up the price of food (a topic for another day).

But the main argument for supporting corn ethanol production has
always been about energy independence and fuel switching. Enabling a
new source of supply into our gasoline supply chain should in theory,
put some some downward pressure on gasoline prices at the pump, and
keep those energy dollars at home rather than send them overseas.

So the real question is, does it?

A very interesting paper was published at Iowa State
last month says yes, US ethanol production (almost all from corn) has
reduced gasoline prices at the pump $0.29-$0.40 per gallon, depending
on the region. Further, that the reduction came largely at the expense
of profits the refining industry would otherwise have made (indicating
perhaps that our ethanol production helped US consumers at the pump,
but did not impact world oil prices).

In their paper entitled The Impact of Ethanol Production on US and
Regional Gasoline Prices and on the Profitability of the US Oil
Refinery Industry, authors Xiaodong Xu and Dermot Hayes analyzed the
impact on price at the pump and refining profits of adding ethanol to
the US gasoline fleets by separating the impact of ethanol from the
major variables like gasoline imports, refining capacity, refining
utilization rates, hurricanes, market concentration in refining,
stocks, and seasonality, that generally affect gasoline price.

I find their $0.29 to $0.40 per gallon results a surprisingly large
number, indicating that ethanol production, while providing on average
well less than 5% of our gasoline supplies over their study period,
could have affected prices at the pump downward to the tune of greater
than 2 to 3 times that percentage level. That result is a huge win for
ethanol proponents, as it suggests that adding ethanol to the US fleet
has significantly benefited consumers (as one would expect), and also
suggests that the ethanol subsidy program (at about $0.40 per gallon
for 5% of the US gasoline production works out to around a 1 to 2 cent
effective tax on gasoline at current levels) may well have paid for
itself up to 20x over or more. The studies authors are careful not
extrapolate too much from the results, but they are certainly
interesting enough to warrant significant further research, and argue
a strong case for further corn ethanol support.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a
boutique merchant bank advising strategic investors and startups in
cleantech. He is founding contributor of Cleantech Blog, a
Contributing Editor to Alt Energy Stocks, Chairman of Cleantech.org,
and a blogger for CNET's Greentech blog.
Labels: cleantech, ethanol, gasoline prices, greentech

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