GoodFuels

Slash ethanol, raise gas prices

On August 7th, the Consumer Federation of America released an anlysis by Dr. Mark Cooper, CFA’s Director of Research, submitted to the Environmental Protection Agency which concluded that “slashing ethanol production, as requested by the state of Texas in its request for a Waiver of the Clean Air Act Renewable Fuel Standard (RFS), would increase gasoline prices substantially.” Dr. Cooper’s analysis was filed in response to a study prepared for the state of Texas by oil economists Phillip K. Verleger and Darrel B. Chodorow “who erroneously claimed increasing demand for gasoline and crude oil would lower prices,” according to Cooper.

Because Dr. Cooper’s analysis was released just as the EPA was announcing its decision to deny Governor Perry’s waiver request, most news reports failed to appreciate the stunning findings that consumers are far better off economically with having increased amounts of ethanol in the gasoline market.

Cooper criticized the claim made by Verleger and Chodorow that by reducing ethanol production, gasoline and diesel prices would fall as refineries increased processing of crude oil. Said, Cooper, “The suggestion that increasing demand for oil will lower oil and gasoline prices is not only contrary to Economics 101 and what independent analysis by Wall Street firms, government agencies, and academic institutions have concluded, but the study’s authors do not provide one shred of evidence to support their strange argument.”

Cooper points to “the more likely impact will be to increase [gasoline and oil] imports.” Cooper also demolished the Verleger/Chodorow claim that refiners would increase refinery capacity to manufacture additional gasoline. On the contrary, said Cooper:

If a deficit of refining capacity is needed to stimulate increased refinery capacity, then the industry has had a strong incentive to add capacity for the past decade and a half. The industry has failed to increase refinery capacity to keep pace with growing demand, preferring to raise its margins in a tight market and meet the shortfall with increasing imports. There has been a deficit of at least 3 million barrels per day for a dozen years and the industry did nothing to reduce it. Reducing ethanol output would simply return the industry to the tighter market condition that it prefers, so it can raise the domestic spread and prices. (Emphasis added)

Finally, Cooper criticized Verleger/Chodorow for ignoring “the effect that ethanol production has had in lowering gasoline prices (Emphasis added). Other analysts have concluded that ethanol production lowers gasoline prices in the U.S. and crude oil prices globally. If ethanol costs less than gasoline, then blending it into fuels should lower the price. While that effect is obvious, it is the least important effect that ethanol has on the gasoline market. There are two other effects that are much larger; ethanol lowers the margins in the refining sector and it puts downward pressure on the price of crude.”

Click here to view the report from Dr. Cooper.