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Another Ethanol Myth Exploded

Increasing Ethanol Production Has Not Depressed Gasoline Prices

 

One argument put forth by the ethanol industry is that increasing ethanol production has depressed gasoline prices. A regression model of U.S. wholesale gasoline prices from 2000 to 2011 shows that ethanol production has had no effect on those prices. Gasoline prices are highly correlated with crude oil prices, inventories, refinery utilization rate, seasonal factors and several supply interruption events. The entire study is available here. A shorter version of the study was published in the Feedstuffs.

 

The E20 "Sweet Spot" Myth

 

Some ethanol proponents argue that by increasing the amount of ethanol in fuel mileage may not decrease, and in fact may even increase. For example, see http://www.ethanol.org/news/index.php?newsid=30.

 

On this page is the following statement: "Not only did the ethanol blends of E20 and E30 perform much better than predicted on an energy-content basis, but in three of the four vehicles tested, these mid-range blends actually offered increased fuel economy over straight gasoline." Not a surprise considering that the work was financed by ethanol organizations.

 

What happens in an independent, carefully controlled, scientific study? The U.S. Department of Energy just (October, 2008) published the results of just such a trial. The findings are not surprising. As ethanol content in gasoline increases mileage declines in line with the fact that ethanol has only 67% of the energy of gasoline. To quote from the study (page xvii):

 

"All 13 vehicles exhibited a loss in fuel economy commensurate with the energy density of the fuel.With E20, the average reduction in fuel economy (i.e., the reduction in miles per gallon) was 7.7 percent compared to E0. Limited evaluations of fuel with as much as 30% ethanol were conducted, and the reduction in miles per gallon continued as a linear trend with increasing ethanol content."

And on page 3-3:

 

"Changes in fuel economy were consistent based on fuel type and the change in energy density of the ethanol blends—approximately a 4% decrease in energy for every 10% of ethanol in the fuel."

 

The results were consistent across make and model and highly statistically significant. The full study can be access here. There is no "Sweet Spot". Ethanol blended into gasoline reduces your fuel mileage and therefore should be priced at a discount to gasoline with no ethanol.

 

Why is this issue important? Ethanol supporters want EPA to allow higher blends that E10. If higher blends are allowed how will you know what you are buying when you fill up? Will your car get the mileage you are used to or about 8% less? If you were to pay the same for E20 as regular E0 gasoline your cost per mile will be about 8% that what you thought you were paying for.

 

Ethanol Fact and Fiction

Or, How the RFA Distorts Facts

 

The U.S. ethanol industry would have us believe that fuel ethanol can replace fossil fuels, significantly reduce our dependence on imported oil, reduce greenhouse gas emissions and reduce the cost of gasoline. They also state that ethanol production does not take away from food production and does not contribute significantly to food price inflation. None of these statements are true.

 

The Renewable Fuels Association (RFA, http://www.ethanolrfa.org/) is the self-proclaimed voice of the U.S. ethanol industry. The membership of the association is made up entirely of companies who either produce ethanol or have an interest in high corn prices. The membership of the RFA has a strong vested interest in promoting ethanol production and the government subsidies that make it more profitable. The motives of the RFA are to promote ethanol production, not the public interest.

 

 

Below are statements from the RFA Web site and some facts that contradict those statements.

 

Statement #1, Objective of the RFA: "Promote federal, state and local government policies, programs and initiatives that encourage expanded ethanol use." (http://www.ethanolrfa.org/about/philosophy/)

 

What is wrong with this statement? The RFA only promotes policies that promote the interests of its U.S. ethanol producer members. The RFA strongly supported the $0.54 tariff on imported ethanol that acts a barrier to wider U.S. use of fuel ethanol, but expired on 1/1/2012.

(http://www.ethanolrfa.org/objects/documents/1121/2007_rfa_legislative_priorities.pdf)

 

Bottom line: The RFA supports wider use of ethanol only when it benefits its members. The RFA has did not want Americans to have access to less expensive ethanol from Brazil.

 

Statement #2, Increasing U.S. ethanol production does not increase food prices: "Corn demand for ethanol has no noticeable impact on retail food prices. A central theme in the “food versus fuel” myth is the false assertion that moderately higher corn prices, spurred by ethanol demand, are leading to higher retail food prices for consumers." (http://www.ethanolrfa.org/resource/facts/food/)

 

The annual rate of food price increase reached more than double the overall inflation rate. This increase coincided with a sharp increase in corn prices that was largely due to increased demand for ethanol production.

 

In fact, the RFA Web site itself even claims that ethanol production raises corn prices! Quote "By increasing the demand for corn, and thus raising corn prices...." (http://www.ethanolrfa.org/resource/facts/economy/).

 

Bottom line: The RFA did not acknowledge the strategic importance of corn in the U.S. and world food supply, even in the face of a near-doubling in the food price inflation rate.

 

Statement #3, We can produce ethanol without reducing food supplies: "Ethanol production does not reduce the amount of food available for human consumption." ( http://www.ethanolrfa.org/resource/facts/agriculture/)

 

What is wrong with this statement? Ethanol from grain is an extremely inefficient way to produce energy. To replace the U.S. gasoline supply with E85 ethanol would require essentially the entire world grain crop. All of the world's corn , wheat, rice and other grains can only satisfy the energy needs of U.S. automobiles. Never mind our trucks, ships, trains, airliners and other transporation needs, or the energy needs of other countries.

 

Total U.S. crop acreage has not changed much in 20 years. All the extra corn acres planted for ethanol have come from other crops, most of which produce human food.

 

We avoided some of the impact of ethanol on food prices because in 2008 we had large buffer stocks of corn and soybeans. Those stocks are gone now. From late 2008 we started to see the full impact of ethanol production on the U.S. food system. In 2009 through 2012 we have seen record large reduction in U.S. meat and poultry supplies, and record high prices.

 

Bottom line: Increased ethanol production is taking essential agricultural raw materials away from the U.S. food industry to line the pockets of the membership of the RFA.

 

Statement #4, Ethanol does not cause significant declines in fuel economy: "FFVs are not optimized to E-85, so they experience a 10% to 15% drop in fuel economy." (http://www.ethanolrfa.org/resource/facts/engine/)

 

What is wrong with this statement? E85 has a significantly lower energy density than gasoline. A gallon of pure ethanol has about 67% of the usable energy of a gallon of regular grade gasoline. E85 therefore has about 71% of the energy content of gasoline. A car that gets 30 mpg on gasoline should get about 21-22 mpg on E85. That 29% (not 10-15%) decline in fuel efficiency is close to the official mileage ratings for flex-fuel vehicles (http://www.fueleconomy.gov/feg/byfuel/FFV2000.shtml).

 

Statement #5, Increased U.S. ethanol production is having a significant effect on U.S. dependence on foreign oil. "In 2006, the production and use of ethanol in the U.S. reduced oil imports by 170 million barrels, saving $11 billion from being sent to foreign and often hostile countries." (http://www.ethanolrfa.org/resource/facts/energy/)

 

What is wrong with this statement? American oil refiners are running at the same high rate as they were in 2007. All that increased ethanol production has done is move gasoline to export markets. Crude oil imports have declined, but only due to increases in U.S. oil production and refinery efficiency.

 

A second error in this statement is that the top 3 suppliers of U.S. petroleum imports are Canada, Saudi Arabia and Mexico. These are generally not considered to be "hostile" countries.

 

Bottom line: RFA statistics cannot be relied upon to paint a realistic picture of the role of ethanol in the U.S. energy economy.

 

Statement #6, The $0.45 per gallon ethanol tax credit (the VEETC subsidy) is needed for a viable ethanol production industry in the U.S. "Permanency of the VEETC and its structure is an effective risk reducing instrument for investors and the financial community, necessary to further expansion of the domestic ethanol industry." (http://www.ethanolrfa.org/objects/documents/1121/2007_rfa_legislative_priorities.pdf)

 

Several years ago, with oil prices of $30 per barrel and $1.25 gasoline, it was not possible to produce grain-based ethanol without subsidies. Today the energy value of corn is generally high enough, without a subsidy, to support a viable U.S. ethanol industry. The VTEEC subsidy has ended, and the sky did not fall on us.

 

Bottom line: Subsidies are no longer required for U.S. ethanol production. The proof is that the subsidy ended on January 1, 2012 and ethanol production did not decline until the 2012 drought caused ethanol production margins to turn negative! As of mid-2012 there have been some ethanol plant closings, but those happened because of a record drought, not the elimination of the VTEEC. 

 

 

Disclosure Statement: Dr. Thomas E. Elam, President of FarmEcon LLC, has no direct financial interest in energy companies, food production, farming or farm land. Dr. Elam owns shares in several mutual funds and a highly diversified portfolio of common stocks and bonds managed by a brokerage company. Managers of those funds may from time to time invest in companies engaged in energy production, food and agriculture.