New university study: Ethanol reduced gas prices by more than $1 in 2011

America's growing use of domestically-produced ethanol reduced wholesale gasoline prices by an average of $1.09 per gallon in 2011, according to updated research conducted by economics professors at the University of Wisconsin and Iowa State University.

The 2011 results, which are up from an average impact of $0.89 per gallon in 2010, were released by the Center for Agricultural and Rural Development (CARD).

The new analysis, an update to a 2009 peer-reviewed paper published in Energy Policy by professors Dermot Hayes and Xiaodong Du, also found gasoline prices have been reduced by an average of $0.29 per gallon, or 17 percent, from 2000-2011 thanks to the growing use of ethanol.

"Growth in U.S. ethanol production has added significantly to the volume of fuel available in the US," said Professor Hayes. "It is as if the U.S. oil refining industry had found a way to extract 10 percent more gasoline from a barrel of oil."

Hayes continued, "This additional fuel supply has alleviated periodic gasoline shortages that had been caused by limited refinery capacity. It has also changed the relative prices of gasoline and diesel and allowed the U.S. to switch from being a net importer of gasoline to a net exporter."

Hayes continued, "As a result of these changes, U.S. gasoline prices are measurably lower than would otherwise have been the case. This gasoline price impact has been documented in a peer reviewed academic journal and the price dampening effect has increased as ethanol production has grown. This impact is greatest in the regions of the country where ethanol penetration is greatest."

Three primary factors are responsible for ethanol's more robust price benefit at the pump in 2011: higher oil and gasoline prices, higher ethanol inclusion, and ethanol being priced at a larger-than-normal discount to gasoline.

As the economists noted, "Average crude oil price increased from about $80/barrel in 2010 to about $95/barrel in 2011. Correspondingly, average U.S. wholesale gasoline prices have risen 30% from 2010-2011. A wider than normal price differential between ethanol and gasoline prices provides further economic incentives for ethanol production and consumption…"

Based on data from the Census Bureau and Energy Information Administration, 116.7 million U.S. households consumed 131.2 billion gallons of gasoline in 2011, for an average of 1,124 gallons per household.

That means ethanol reduced the average American household's spending on gasoline by more than $1,200 in 2011.

Since 2000, the $0.29-per-gallon price dampening impact of greater domestic ethanol use has saved the American economy an average of nearly $40 billion per year.

As a result, ethanol has helped the average American household reduce its spending on gasoline by an average of more than $340 per year since 2000.

"While it's hard to imagine that gas prices could be even higher than they are now, this study clearly underscores that the current pain at the pump would be far worse without ethanol," said Bob Dinneen, president and CEO of the Renewable Fuels Association, which helped fund the research.

He added, "Because ethanol makes up 10 percent of our gasoline pool today, it significantly reduces demand for oil and puts downward pressure on gas prices. From coast to coast and border to border, ethanol is helping save consumers money. In these times of high unemployment and sky-high gas prices, ethanol is one America-made solution that is providing some respite for battered American families trying to make ends meet."