Ethanol plays key role in fuel supply, helps lower prices

Want to pay nearly $100 to fill up your 15-gallon gas tank? You would if ethanol were removed from the market, according to a report (.pdf) by Xiaodong Du and Dermot J. Hayes at the Center for Agricultural and Rural Development at Iowa State University.

They said if ethanol production came to an immediate halt, under a very wide range of parameters, the estimated gasoline price increase would be of "historic proportions," ranging from 41 to 92 percent. At today's prices you'd be looking at $5.60-$7.60 per gallon gas without ethanol.

Economists are already concerned what $100 oil and $4 gas is doing to the economy. Just imagine the impact of $6.50 per gallon – or $97.50 for a 15-gallon fill up!

The researchers also looked at the impact of ethanol on fuel prices for 2010.

The more than 13 billion gallons of ethanol in the marketplace last year saved motorists, on average across the country, 89 cents per gallon in 2010. The lowest impact regionally was 58 cents per gallon in the East Coast, while motorists in the Midwest saved $1.37 per gallon (that's more than $20 for each 15-gallon fill-up). 

Considering oil and gas prices are higher this year than last, it will be interesting to see of the researchers will do an update using 2011 figures...certainly the savings numbers would be even more.

In addition to looking at just 2010, the researchers also looked at numbers from January 2000 to December 2010. For that 11-year period, the growth in ethanol production reduced wholesale gasoline prices by 25 cents per gallon on average across the country. Regionally, the Midwest saw the biggest impact, with a 39 cent per gallon reduction over that time period, while the East Coast had the smallest impact at 16 cents gallon.

The smaller impact over the 11-year period makes sense because if you look back to 2000, only 1.6 billion gallons of ethanol were produced – a very small percentage of the total fuel market. Ethanol production didn't surpass 2 billion gallons until 2002 and pass 6 billion gallons until 2007 and 10 billion gallons until 2009. The 13+ billion gallons of ethanol produced last year is about 10 percent of our fuel supply – and without we'd really see some pain at the pump.