Slash ethanol, raise gas prices

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by: Matt Hartwig5
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Slash ethanol, raise gas prices
Matt Hartwig
August 11, 2008

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.