MIT Study Debunks RFA/Vilsack Claims on Ethanol, Gas Prices

July 17, 2012

Back in May, I discussed a study conducted for the Renewable Fuel Association (RFA) by Iowa State University’s Center for Rural and Agricultural Development (CARD). The study claims that from January 2000 to December 2011, “the growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average across all regions,” and reduced average gasoline prices by a whopping $0.89 per gallon in 2010 and $1.09 per gallon in 2011. Ethanol boosters like the RFA and USDA Secretary Tom Vilsack tout this study as proof that federal biofuel policies benefit consumers and should be expanded.

The CARD researchers, Xiaodong Du and Dermot Hayes, attempt to determine the consumer benefit of ethanol by inferring what motor fuel prices would have been over the past decade had there been no increase in ethanol production. Ethanol now constitutes roughly 10% of the motor fuel used by U.S. passenger vehicles. Du and Hayes conclude that without ethanol, U.S. motor fuel supply would be significantly smaller and pain at the pump significantly greater.

This procedure, I argued, is ridiculous. First, it assumes that refiners are like deer caught in the headlights and do not respond to incentives. Even if motor fuel prices increase by up to $1.09/gal nationwide over a 10-year period, we’re supposed to believe refiners would not increase output and take advantage of this opportunity to sell more of their product at higher prices. But that’s exactly what refiners would do. In the process, supply would come back into balance with demand, pushing fuel prices down.