20 Jun 2011

Does Ethanol Make Gasoline Cheaper?

Economics, Shameless Self-Promotion 2 Comments

There is a big push by the pro-ethanol people to publicize the results of a new study from Iowa State showing that ethanol “reduced gas prices by 89 cents per gallon in 2010.” I didn’t have too much time to respond, but here is what I wrote for IER last week on it.

For those of you who are professional economists with econometrics training, I would love to hear your reaction. In particular, please check out my analysis regarding the differential impact that ethanol supposedly had in the Midwest versus the East Coast. The study found that ethanol “held down” gas prices more in the Midwest than in the East Coast, and yet the actual change in gas prices over the period in question is much smaller than the reported difference. So I took this to mean that the regression the Iowa State professors ran, doesn’t really do what they think it does.


(Last thing: If libertarian purists want to get into the distinction between tax credits versus outright subsidies, that is fine. I actually was going to write on that, but the post was already too long. Another issue is that there are actual mandates for blending a certain volume of ethanol by certain years, so there is definite intervention at the federal level into the ethanol industry. I.e. it’s not merely letting them keep more of their money than they take from other producers who rely on conventional oil and gasoline.)

2 Responses to “Does Ethanol Make Gasoline Cheaper?”

  1. Joseph Fetz says:

    I know that you are looking for econometicists to weight in, but I must include three considerations into their calculations: increased cost of food sources used for ethanol (a differential of costs), decreased MPG (energy efficiency) for ethanol fuel (self explanatory), and increased maintenance on vehicles (due to alcohol’s “drying-out” effect on fuel lines and rubber gaskets not designed for alcohol fuels). Don’t worry, I won’t make you account for the actual processing of ethanol, I take that as a given inefficiency.

  2. Scott says:

    Not a professional economtricicicist, but just wanted to report that Celanese developed a way to produce ethanol from natural gas much, much cheaper than from corn, but the Fed’s will not let their ethanol count towards the mandated content.


    It ain’t about the economics, its about shelling out the subsidies to farmers and pretending to save the planet.

    But everybody knew that…