The Renewable Fuels Association (RFA) is giving us up to 2.6 trillion reasons why blending ethanol with the US fuel supply are a good thing for the economy. Citing former Ford and Carter administration energy advisor Philip Verleger, the RFA estimates that gas would be between 50 cents and $1.50 more per gallon than its costs today. That means that Americans are saving $700 million a year on the low end and $2.6 trillion on the high end.

Getting more to the root of the issue, Verleger says oil prices would be as much as $40 a barrel higher than they are now if the ethanol wasn't blended in and notes that US oil use is reduced by about the amount produced each year in Ecuador because of the ethanol requirement. AAA pegs the national average at about $3.50 a gallon and the price for a barrel is around $100-$110.

Of course, Verleger merely provides a yin to the yang representing the arguments against boosting ethanol in the US fuel blends. Petroleum lobbyists have been hammering home an argument that gasoline with higher ethanol blends may damage older cars and motorcycles while pulling from the country's food supply. The American Petroleum Institute (API) went as far as trying to ban sales of gasoline blended with 15 percent ethanol (E15). While that effort was rejected by the US Supreme Court in June, some folks have said oil companies are still making it difficult for service stations to get access to E15. As of early this month, the RFA said there were only 30 stations across the US selling E15. Check out the RFA's press release below.
Show full PR text
New Analysis: Ethanol Cutting Crude Oil, Gasoline Prices
September 23, 2013

(September 23, 2013) WASHINGTON - Consumers are saving $0.50-1.50 per gallon on gasoline as a result of increased ethanol production under the Renewable Fuel Standard (RFS), according to a new analysis by renowned energy economist Philip K. Verleger, who served as an advisor on energy issues to both the Ford and Carter administrations.

"The implication for world consumers is clear... [T]he US renewable fuels program has cut annual consumer expenditures in 2013 between $700 billion and $2.6 trillion," writes Verleger in a short commentary available on pkverlegerllc.com. "This translates to consumers paying between $0.50 and $1.50 per gallon less for gasoline." The commentary summarizes a more detailed analysis that was included in Verleger's August Petroleum Economics Monthly newsletter.

Crude oil prices would be between $15-$40 per barrel higher today without the substantial volumes of ethanol that have been added to petroleum inventories since enactment of the RFS. According to the commentary, the RFS today has added "...the equivalent of Ecuador's crude oil output to the world market at a time of extreme tightness."

"Had Congress not raised the renewable fuels requirement, commercial crude oil inventories at the end of August would have dropped to 5.2 million barrels, a level two hundred million barrels lower than at any time since 1990," Verleger writes. "The lower stocks would almost certainly have pushed prices higher. Crude oil today might easily sell at prices as high as or higher than in 2008. Preliminary econometric tests suggest the price at the end of August would have been $150 per barrel."


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    • 1 Second Ago
  • 34 Comments
      Allch Chcar
      • 1 Year Ago
      The numbers are off. My guess, without looking at the source, is fixed costs for the Renewable Fuels Standard and Ethanol related subsidies.
      Spec
      • 1 Year Ago
      In other news, Realtors report that now is the best time to buy or sell a house!
        raktmn
        • 1 Year Ago
        @Spec
        Well, this report isn't actually from anyone who sells ethanol, so it is slightly different. But yea, it appears that this LLC makes money selling reports and doing consulting about stuff like ethanol, so close enough.
      EZEE
      • 1 Year Ago
      Okay....let me break this down more simply, as, you people are using really big words. I don't see enough info to 'prove' this number, but, they are leaving out a few factors on the analytics (I know big words too, dammit). The biggest problem that I do not see is the question of 'what if gas did increase dramatically?' In other words, what would people's reaction be?' Would people happily continue with (roughly) $5 aa gallon gas, or change their habits? Most likely habits would change. Remember how, during the last major spike, people were buying ego metros at original price? And then guess what, gas prices dropped (also, George Bush announced additional drilling, which caused the speculators to adjust and futures lowered). In this case, without ethanol, would there be additional upward pressures on the commodities market? Yes. Would Obama try to adjust by releasing the strategic reserve, ordering extra drilling, or would people adjust their driving habits to react? Yes to all, or some of those. Also, the whole argument is a fun one. We have a group of industries, all subsidized to varying degrees, yelling (I. Favor or against) against mandates (another fun factor in a commodities market) about unnatural factors in said commodities. The mind boggles.
        Marco Polo
        • 1 Year Ago
        @EZEE
        @ EZEE The world energy market is very complex, and largely misunderstood. The pump price for gasoline in the USA is dependent on a wide range of factors. The concept that the price is governed solely by supply and demand, is far too simplistic and long out of date. But the RFA claim that adding a more expensive, lower octane fuel, with all the additional blending and transport costs, somehow mysteriously lowers the price at the pump, is ludicrous. Even the hardly right-wing Washington Post is critical of such claims, : http://articles.washingtonpost.com/2013-08-19/opinions/41424109_1_renewable-fuel-standard-rfs-ethanol Or; http://fuelfix.com/blog/2013/03/19/drivers-risk-13-billion-gas-price-hike-as-ethanol-charge-grows/
          Allch Chcar
          • 1 Year Ago
          @Marco Polo
          Ethanol has a much higher AKI octane rating than Gasoline. I'm sure you just meant less energy dense and made an honest mistake. Market conditions change being what they are. It's not always more expensive than Gasoline on a BTU basis(it's never more expensive on a volume basis). But check out the prices of other similar octane additives, if you want a valid comparison. Ethanol blending is absolutely a way to stretch out Domestic Oil consumption. Oil Refineries are now allowed to use a lower octane Blending stock with E10. This stretches out each barrel of Oil as less is required to make a lower octane Gasoline which also means savings. Using Ethanol means they don't have to buy RINs to meet compliance. Which is now a necessary cost of business. (Thanks Bush!) Myself, I'm looking for ways to convert previous Gasoline engines to E85 and run more efficiently. Needless to say I support more expensive yet more efficient fueling options. Oil Refineries have more than enough customers, so they won't miss me. It also means I get to read interesting academic studies and talk to people making insane levels of HP on stock block engines.
        EVnerdGene
        • 1 Year Ago
        @EZEE
        In my humble opinion (hahahahaha) Ethanol has only prolonged the reign of the FUV.
        EVnerdGene
        • 1 Year Ago
        @EZEE
        EZEE, you mentioned the SPR (Strategic Petroleum Reserve). You know our emergency stash - reserved for catastrophic national emergencies. Prez released oil from the SPR a few months before the 2010 election. Was it replaced ? What was the average barrel price of the oil in storage ? If replaced; what was the average price of the replacement oil ? What budget was used to buy this replacement ? (stimulus funds, deficit spending added to national debt, QE1 or 2 ???) National emergency ? btw: far as I can find, it was not replaced (some of our x-spurt surfers can research this)
      2 wheeled menace
      • 1 Year Ago
      Hm, how does replacing 10% of your gasoline ( $3.50/gal or so on average? ) save you $1.50/gallon? Are we riding the bottom edge of some kind of odd shaped supply and demand curve?
        raktmn
        • 1 Year Ago
        @2 wheeled menace
        2WM -- the phenomena you are talking about is called the Elasticity of Demand for oil products. In other words, the question is how much will prices change in response to demand. A great example is Twinkies. Back when supply of Twinkies was plentiful, if one store ran out of Twinkies, nobody panicked and went running to the next store, who then raised their prices by 50% to meet demand. No, folks just didn't buy Twinkies that trip, and bought them some other time. This is what happens when demand is elastic. Under this situation, prices do not change much at all when there are temporary supply/demand mismatches. Of course we all saw what happened when the supply of Twinkies dried up. Twinkies became "Inelastic" and prices quickly went through the roof. Demand for oil products are generally considered to be "inelastic". Companies need fuel to operate, and people need fuel to go about their daily lives. So people don't just forget about buying fuel when it isn't available, and plan to pick more up in next week's shopping trip. This means supply problems in fuel generally cause rapid increases in prices. This is because it takes rapid price increases in order to change the buying behavior of folks buying gas. The old rule of thumb was that a 2% change in demand will cause a 10% change in fuel prices because of the inelasticity of fuel demand. I don't know if this is still a valid rule of thumb, but it gives you an idea of how fuel prices can react quite quickly to supply/demand changes.
          raktmn
          • 1 Year Ago
          @raktmn
          Oh, by the way, the impact on prices of inelastic demand is non-linear. So if there is a 2% change in demand that causes a 10% change in price, a 4% change in demand wouldn't just cause a 20% change in price. It would actually be higher than 20%. How much higher would depend upon how inelastic the demand really is.
        brotherkenny4
        • 1 Year Ago
        @2 wheeled menace
        The assumption, likely to be correct, is that because oil is a fungible commodity, reducing overall world consumption lowers price. Higher demand would result ethanol were not used, thus driving the price of a barrel of oil higher. You can argue about the extent of the effect, but not that it exists.
          mylexicon
          • 1 Year Ago
          @brotherkenny4
          Oil is not fungible. Companies spend billions analyzing the oil from each field, devising blends that will work in their refinery infrastructure, and paying people with PhD's to analyze the refinery cost of various blends and devise buying schemes to optimize company profit. Here is an oversimplified public list of various crude types: http://en.wikipedia.org/wiki/List_of_crude_oil_products
          Ryan
          • 1 Year Ago
          @brotherkenny4
          I lived through a month (in 2003?) where Phoenix had 1/3rd of their pipeline capacity cut off and fuel trucks running 24 hours a day weren't able to meet demand. There were gas lines where people had to wait a long time to fill up, and some stations just ran out of gas because they weren't able to charge (gouge) as much as they could to not run out, but to make the most money possible.
          EZEE
          • 1 Year Ago
          @brotherkenny4
          I don't know what fungible means....but 'fun' is part of it, so I am happy.
          Vlad
          • 1 Year Ago
          @brotherkenny4
          I don't think anybody disputes that increased supply pushes prices down. However, to push prices full 30% down (1.5/(3.5+1.5) ) with 10% increase in supply seems... questionable. Possible, but unlikely. We must be in a very interesting place on the curve, as 2WM pointed out.
      Ryan
      • 1 Year Ago
      If there is more demand for oil, then the price will go up...And if we are right on the intersection of supply meeting demand with ethanol, then without it, funny things can happen to prices of a product people are desperate for, yet the supply isn't enough to meet it. How much would someone pay not to have to wait in an hour long gas line?
      EVnerdGene
      • 1 Year Ago
      Some of you guys actually believe this drool ?
        Actionable Mango
        • 1 Year Ago
        @EVnerdGene
        Well, "up to $1.50" technically includes an increase of $0.00 and everything else in between, so yes, this weasel-worded statement is true.
        raktmn
        • 1 Year Ago
        @EVnerdGene
        The authors don't show enough math to either confirm nor deny their claim of between 50 cents and $1.50 more per gallon. But the underlying claim that increasing the supply of fuel will decrease the price is based upon sound supply/demand economic theories, not drool. You do believe in classic supply/demand models, where increasing supply in the face of inelastic demand will lower prices, right? Don't make me link to some old school Adam Smith stuff....
      raktmn
      • 1 Year Ago
      I read through all the links, and the links in the links, and the small amount of math that was shared was a bit short in detail: "The total amount [of ethanol] blended into the petroleum mix from 2008 to 2012 was seven hundred million barrels. Had Congress not raised the renewable fuels requirement, commercial crude oil inventories at the end of August would have dropped to 5.2 million barrels, a level two hundred million barrels lower than at any time since 1990....Preliminary econometric tests suggest the price at the end of August would have been $150 per barrel." There simply isn't enough math here to either confirm or debunk this claim. All the details are left out, so there is no way to check their work. The index of the 2 page summary teases 28 pages of statistical details, but these details appear to be only available to "subscribers" which I assume must pay for the content since this is an LLC that is authoring this.
      BipDBo
      • 1 Year Ago
      "the RFA estimates that gas would be between 50 cents and $1.50 more per gallon than its costs today. That means that Americans are saving $700 million a year on the low end and $2.6 trillion on the high end." Umm, Math, are you there? $1.50 / $0.50 = 3 $2.6 trillion / $700 million = 3714
        paulwesterberg
        • 1 Year Ago
        @BipDBo
        Ethanol's low cost and the blending subsidies account for .50 cents per gallon, 1.50 is a made up number based on European petrol prices or some other malarkey. 2.1 trillion doesn't sound impressive enough so they decided to fudge that number up a bit, most people can't do math and will never notice.
          BipDBo
          • 1 Year Ago
          @paulwesterberg
          Copying from the press release, the author just made an error by typing 700 million instead of 700 billion. What a difference one letter can make.
          raktmn
          • 1 Year Ago
          @paulwesterberg
          Paul, There aren't any blending subsidies for Ethanol anymore. They ended Jan 1st 2012. And they weren't even .50 cents even back then. It dropped from .50 cents to .45 cents way back under the previous administration.
      EZEE
      • 1 Year Ago
      @rak Wow.
      Scr
      • 1 Year Ago
      Yea right. Also factor in the decrease in fuel efficiency from the less power dense ethanol blend, and the fuel needed to grow the corn to squeeze, and their number is BS. Also we need to factor in the dramatic rise in food prices from corn being diverted to fuel rather than feed. Gasoline costs more with ethanol, not less.
        raktmn
        • 1 Year Ago
        @Scr
        How can food prices be going up due to corn prices, when corn commodity prices have been dropping in free-fall all year long? From Business Week earlier this month: "[Corn] Prices are down 33 percent this year and 45 percent from a record $8.49 on Aug. 10, 2012" http://www.businessweek.com/news/2013-09-12/corn-wheat-drop-as-usda-sees-larger-grain-supply-than-forecast Quick, check your grocery bill. Is it down 33 percent from the beginning of this year, or down 45% compared to your largest record grocery bill? If not, how again is there a link between corn being diverted to fuel and the price of food at the grocery store? I hate to break it to you, but a box of Corn Flakes only has a few cents worth of corn in it. The prices of groceries have very little to do with any commodity prices, much less just the price of corn. There is no competition for land between corn and other food crops, because we have a SURPLUS of farm land. In fact, we have such a huge surplus of farm land, that we have to pay farmers not to plant crops. It would be like you and me "competing" for a package of Twinkies at the grocery store, when we are standing right in front of a huge display of Twinkies. There is no competition, because people don't compete for resources that are plentiful. In order for food to compete with fuel, we would have to be down to the last of our farm land, the same way people didn't compete for Twinkies until the supply of twinkies ran dry.
      Marco Polo
      • 1 Year Ago
      Desperate propaganda from a desperate industry, employing a desperate old lobbyist, to peddle dubious maths and vague theories to support an environmentally harmful and hopelessly uneconomic fuel product. Ethanol increases the pump price of US fuel, not decreases. The whole US corn-based ethanol industry is totally uneconomic, and relies upon a government mandate to remain in business. Remove the mandate, and the US corn-based ethanol industry dies. The Industry only survives because of the lobbying power of the Farm and Big Ag lobbyist supported by a decreasing number of ill-informed advocates, like Philip Verleger, nostalgic for the day's of Jimmy Carter !
        EZEE
        • 1 Year Ago
        @Marco Polo
        I sit back reading you and Rak, with my head cocked to one side, much like if you presented a dog with some complex object it has never seen before. Still in a good mood and ready to go jumping through fields of grass for no reason whatsoever, but clueless, and wondering if this will end up with me getting treats. The first paragraph was classic marco.
          Marco Polo
          • 1 Year Ago
          @EZEE
          @ Ezee, Lol ! I I like the reference to a dog ! I wonder if you remember the old HMV (His Master's Voice) trade mark ? ( I think in the USA it was used by Victor or RCA.) The trade mark used the picture of a small dog, starring with some bafflement, into the trumpet of an old style wind-up gramophone. The trade mark was so successful the the company changed it's name from the 'Gramophone Company' to HMV (His Master's Voice) .
      Vlad
      • 1 Year Ago
      Do I believe Big Ag or Big Oil? Tough choice...
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