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Ethanol saved you $1.09/gallon

In 2011, consumers saved an average of $1.09 a gallon for gasoline, thanks to the addition of less expensive ethanol in the mix, according to a study by the Center for Agricultural and Rural Development (CARD) that was released Tuesday by the Renewable Fuels Association (RFA).

“Last year we were careening toward $5 a gallon gasoline,” said RFA president, Bob Dinneen, “…but because of ethanol, consumers were given some relief.”

The CARD study, which cost RFA $30,000, was an update of independent research conducted by Iowa State University economist Dermot Hayes and University of Wisconsin agricultural economist Xiaodong Du.

Hayes said the work on this subject began when Xiaodong Du was a graduate student working on his Ph.D at ISU and it grew out of the student’s interest in the relationship of energy prices and the price of corn.  For the study released today, both economists used the same methods that they employed for a peer-reviewed paper published in 2009 in the journal, Energy Policy.

The updated study also showed that from January 2000 to December 2011, the growth of ethanol production saved consumers an average 29¢ a gallon on auto fuel, a 17% cut in what gasoline prices would have been without the added ethanol.

In 2011, the savings of more than $1 per gallon was due in part to increased ethanol production compared to more than a decade earlier, as well as a wider than normal price spread between inexpensive ethanol and gasoline.

Hayes told reporters that two other factors accounted for a surprising savings.

First, ethanol has helped increase the fuel supply so much that the U.S. has gone from being a major importer of finished gasoline to being an exporter of both gasoline and ethanol. That means the U.S. now pays a world price for gasoline minus shipping costs, instead of adding on shipping costs.

Second, with ethanol accounting for 10% of the volume of fuel for gasoline-powered cars, the industry has had the effect of enlarging the nation’s fuel refining capacity.

The study also showed big regional differences in savings from ethanol. Instead of a national average savings of 29¢ a gallon since 2000, the Midwest has saved 45¢ a gallon and the Gulf Coast has saved 19¢ a gallon. Last year, the difference was more pronounced, with a savings of $1.69 a gallon in the Midwest, where most ethanol is produced and where ethanol transportation costs would be lowest, to 73¢ a gallon in the Gulf Coast.

Ethanol has lower energy content, but taking that into account the savings of a 10% blend of ethanol over gasoline is reduced by only about 9¢ a gallon, using a gasoline price of $3.50 per gallon.

In the past, some critics of ethanol have considered the cost of ethanol tax credits to consumers to debunk ethanol’s savings. Those tax credits expired at the end of 2011. The oil industry also receives a complex set of energy tax credits.

Hayes said the CARD study did not add in the effects of tax credits and was based on market prices of gasoline and ethanol. The savings amounted to more than $1,200 last year for the average American household.

The full study is available here.

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