May 15, 2008 11:02 AM PDT

Is ethanol lowering prices at the pump for consumers?

Posted by Neal Dikeman

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 Green Tech blog.