Published on October 15th, 2013 | by James Ayre9
Ethanol Doesn’t Lower Gas Prices — Gas Prices Not Substantially Affected By Inclusion Of Ethanol, Research Finds
The widespread use of ethanol hasn’t substantially reduced the wholesale cost of gasoline, according to new research from MIT. The new findings contradict earlier research that attributed an observed reduction in the wholesale cost of gasoline during certain years to the increased use of ethanol as a gasoline additive during those years. Earlier research, which according to the researchers behind this new work, is problematic for a number of different reasons — and was essentially just a case of “a correlation being interpreted as a causal relationship.”
The findings of the previous research — that widespread use of ethanol has reduced the wholesale cost of gasoline by $0.89-$1.09 per gallon — have been repeatedly referenced over the past couple of years, and have been cited by a number of important policymakers during debates and public conversations. And yet, as this new work shows, the findings appear to have been merely the result of a trick of the eye.
The press release from MIT explains:
That prior work involves what energy economists call the “crack ratio,” which is effectively the price of gasoline divided by the price of oil. The crack ratio is something energy analysts can use to understand the relative value of gasoline compared to oil: The higher the crack ratio, the more expensive gasoline is in relative terms. If ethanol were a notably cheap component of gasoline production, its increasing presence in the fuel mix might reveal itself in the form of a decreasing crack ratio.
So while gasoline is made primarily from oil, there are other elements that figure into the cost of refining gasoline. Thus if oil prices double, Knittel points out, gasoline prices do not necessarily double. But in general, when oil prices — as the denominator of this fraction — go up, the crack ratio itself falls.
The previous work evaluated time periods when oil prices rose, and the percentage of ethanol in gasoline also rose. But researchers Christopher Knittel and Aaron Smith assert that the increased proportion of ethanol in gasoline merely correlated with the declining crack ratio, and did not contribute to it in any causal sense. Instead, they think that changing oil prices drove the change in the crack ratio, and that when those prices are accounted for, the apparent effect of ethanol “simply goes away.”
To make the point even more clear, Knittel and Smith conducted “anti-tests” of that study’s models — essentially just inserting unconnected dependent variables into the model to see if there are any “false” correlations. What they found was that the model also produced a strong correlation between ethanol content in gasoline and a number of other figures that were most certainly not causally related to such a large degree, such as US employment figures.
To be clear, though, the researchers aren’t saying that ethanol doesn’t have a place in the market, just that the figures used in discussions should be more accurate: “Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment,” says Christopher Knittel, the William Barton Rogers Professor of Energy and a professor of applied economics at the MIT Sloan School of Management.
Currently, corn ethanol constitutes around 10% of US gasoline, up from about 3% in 2003.
The new findings will be published in the peer-reviewed The Energy Journal.