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Tuesday, May 15, 2012

Does Ethanol Really Lower The Price Of Gasoline?


The latest USDA Supply Demand Report indicated that corn processing for ethanol purposes would not increase much from the 2011 crop to the 2012 crop.  About 5 billion bushels would be converted to ethanol.  One reason is the blend wall that serves as a maximum for the 10% fuel blend to be incorporated into the nation’s motor fuel supply.  And since the demand for gasoline is declining due to the recession, the demand for ethanol is not growing.  But while ethanol will be consuming nearly one-third of the US corn crop, it will also have another significant benefit to family budgets and the US economy.

The price of gasoline pushed to $4 per gallon earlier in the spring in many areas, and above $4 in many large cities where demand is more concentrated. But without ethanol being blended into the gasoline, the price of gas would be closer to $5, say economists from Iowa State University and the University of Wisconsin.  Their study of how ethanol has impacted the price of gas in the past year indicates the US motoring public would be spending much more of their family budget on gas than is the case.

Their report updated a prior study, and incorporated 2011 data, which included $95 per barrel oil prices and a 13.9 billion gallon volume of ethanol blended into gasoline.  However, they found that the impact was significantly different in different regions of the US because of the petroleum markets.  They report they growth in ethanol production in 2011 resulted in a national average savings of 29 cents per gallon off the price of gasoline.  In the Midwest, the savings for 2011 alone was 45 cents, while the East Coast, West Coast and Gulf Coast all had savings of about 20 cents per gallon.  In the Rocky Mountain region, the savings was about 30 cents per gallon. 

The economists report, “The (regions) are also very different in terms of their economic conditions, oil and petroleum characteristics, oil related pipeline infrastructure, and local product supply and demand conditions. Therefore one would expect different gasoline price impacts for each region.”
1) The East Coast has the highest demand for refined products in the country, but it has very limited refinery capacity. Its regional demand is largely satisfied by the Gulf Coast and by foreign imports.
2) The Midwest is distinct in its coexistence of a highly industrialized section and a rural agricultural section. Much of the crude oil used in the Midwest is piped in from the Gulf Coast and Canada.
3) The Gulf Coast region, including Texas, Louisiana, New Mexico, Arkansas, Alabama, and Mississippi, produces over 50% of the nation’s crude oil and 47% of its final refined products. This region also serves as a national hub for crude oil and is the center of the pipeline system. It also exports gasoline.
4) The Rocky Mountain region has the smallest and fastest-growing oil market in the U.S. With only 3% of national petroleum product consumption, it has the lowest ethanol penetration.
5) The West Coast region is independent of other regions since it is geographically separated by the Rocky Mountains. In addition, the refinery market of this region is highly concentrated.

In a broader picture, the economists say that the 10% contribution of ethanol to expanding the nation’s fuel has allowed the US to switch from being a major importer of only petroleum to being an exporter of both petroleum and ethanol.  And when compared to Europe, which is only the former, ethanol has actually lowered the average cost of gasoline by $1.09 per gallon.  When that is applied to each of the petroleum distribution regions in the US over the past decade, the economists say that is a savings of 76 cents per gallon on the East Coast, $1.69 per gallon in the Midwest, 73 cents on the Gulf Coast, $1.11 per gallon in the Rocky Mountain region, and 86 cents per gallon on the West Coast.

Ethanol is only consuming 5 billion bushels of corn and raising the price of that commodity, but is also saving money for the US motorist.  Based on gasoline prices and ethanol fuel production increases in 2011, ethanol saved motorists 29 cents per gallon.  However, based on the past decade, the impact of ethanol has provided an average of $1.09 savings per gallon to motorists.

Posted by Stu Ellis on 05/15 at 05:16 AM | Permalink

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