BEYOND THE BIOFUEL-BASHING EDITORIALS: ETHANOL REALLY REDUCES PRICES AT THE PUMP
By Bob Dinneen, President, Renewable Fuels Association
When I was growing up, I learned to watch out for guys who pat you on the back with one hand and then sucker-punch you with the other.
On the same day that the Journal called me “our indefatigable friend” and published my letter to the editor responding to an editorial entitled “Ethanol vs. the World” (Aug. 11), they published yet another sarcastic screed, “How Ethanol Causes Joblessness” (Aug.16). The latter editorial ridicules what it claims was the methodology behind a study by academic economists showing that America’s growing use of domestically produced ethanol reduced wholesale gasoline prices from what they would otherwise have been by an average of $1.09 per gallon last year.
Over the past year alone, the Journal has published ten editorials against ethanol. By way of comparison, to select an issue that looms larger to most people, the Journal has editorialized about immigration only nine times.
If this one-sided obsession were about an entirely esoteric subject, this controversy would be confined to journalism reviews and economic journals. But the constant bashing of biofuels distorts the debate about issues that matter to most Americans: Can we hold down prices at the pump? Reduce America’s addiction to imported oil, some of it coming courtesy of strongmen such as Hugo Chavez whom the Journal usually wants to weaken? Dump fewer pollutants into the atmosphere at a time when extreme weather is causing drought in the Midwest?
Debating these issues requires factual analysis, not philosophical autopilot. Last year, the American ethanol industry produced 13.9 billion gallons of biofuels, an increase from 13.2 billion gallons in 2010 and only 1.63 billion in 2000. Most of this ethanol is sold in a blend of 10 percent biofuels and 90 percent gasoline – E10. Because ethanol makes up 10 percent of the nation’s gasoline pool today, it significantly reduces demand for oil, putting downward pressure on gasoline prices at the pump.
While it is difficult to imagine that gasoline prices could have been higher than they were at their worst points over the past year, the pain at the pump would have been even worse without ethanol. Why?
First, adding 13.9 billion gallons of biofuels to the motor fuel pool – and blending it with gasoline in E10 – has a similar effect to the US oil refining industry finding a way to extract 10 percent more gasoline from a barrel of oil. It’s Economics 101: When you increase the supply of something, there’s a downward pressure on its price.
Second, ethanol has been priced at a larger-than-usual discount to gasoline. From 2010 to 2011, average crude oil prices increased from about $80/barrel to about $95/barrel.
Third, the additional fuel supply has alleviated the periodic gasoline shortages, resulting from limited refinery capacity, that contribute to price spikes.
Fourth, American ethanol reduces our dependence on the OPEC cartel and unfriendly or unstable regimes who used to raise prices at will. Eighty percent of the new motor fuel produced in the US since 2005 has been ethanol.
Fifth, the Renewable Fuels Standard (RFS) has indeed encouraged higher ethanol inclusion in motor fuel, up to 10 percent today. But the RFS isn’t the whole story. In recent years, oil refiners have blended 2.5 billion more gallons than required under the RFS because it made economic sense.
The same commonsense economics informs the study that the Journal ridicules without refuting. Prepared by economists Dermot Hayes of Iowa State University and Xiaodong Du of the University of Wisconsin, the study was peer-reviewed, published in an academic journal, and updated annually. This study found that American ethanol reduced wholesale gasoline prices by an average of $1.09 per gallon in 2011, $0.89 per gallon in 2010, and an average of $0.29 per gallon since 2000.
In similar studies, the US Departments of Energy and Agriculture found savings ranging from 20-35 cents per gallon, while Merrill Lynch reported a 50-cents-per-gallon reduction. Meanwhile, agricultural economists Hassan Marzhoughi and P. Lynn Kennedy of Louisiana State University found savings of 78 cents per gallon.
As for the paper that the Journal cites as refuting the Iowa State University study, it hasn’t been peer-reviewed or published – and it actually agrees that ethanol reduces gasoline prices at the pump, although its estimate is only 13 cents-per-gallon.
Suspend the Renewable Fuel Standard? Maybe the Journal really wants to repeal the law of supply and demand.