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Ethanol Production and Gasoline Prices: A Spurious Correlation

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  • Christopher R. Knittel and Aaron Smith

Abstract

Ethanol made from corn comprises 10% of U.S. gasoline, up from 3% in 2003. This dramatic increase was spurred by recent policy initiatives such as the Renewable Fuel Standard and state-level blend mandates and supported by direct subsidies such as the Volumetric Ethanol Excise Tax Credit. Some proponents of ethanol have argued that ethanol production greatly lowers gasoline prices, with one industry group claiming it reduced gasoline prices by 89 cents in 2010 and $1.09 in 2011. The 2010 figure has been cited in numerous speeches by Secretary of Agriculture Thomas Vilsack. We show that these estimates were generated by implausible economic assumptions and spurious statistical correlations. To support this last point, we use the same statistical models and find that ethanol production "decreases" natural gas prices, but "increases" unemployment in both the U.S. and Europe. We even show that ethanol production "increases" the ages of our children. Overall, we see no compelling reason to believe that the effect of ethanol use on gasoline prices has been more than $0.10 per gallon.

Suggested Citation

  • Christopher R. Knittel and Aaron Smith, 2015. "Ethanol Production and Gasoline Prices: A Spurious Correlation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    • Handle: RePEc:aen:journl:ej36-1-04
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    Cited by:

    1. Ha, Sang su & Welch, J. Mark & Anderson, David P., 2016. "Time Varying Correlation Research Among Corn, Ethanol, And Gasoline: Copula –Garch Approach," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252741, Southern Agricultural Economics Association.
    2. Gabriel E Lade & C -Y Cynthia Lin Lawell & Aaron Smith, 2018. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 707-731.
    3. Davison, Matt & Merener, Nicolas, 2023. "Equilibrium and real options in the ethanol industry: Modeling and empirical evidence," Journal of Commodity Markets, Elsevier, vol. 31(C).

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