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Ethanol Production and Gasoline Prices: A Spurious Correlation

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  • Christopher R. Knittel
  • 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 & Aaron Smith, 2015. "Ethanol Production and Gasoline Prices: A Spurious Correlation," The Energy Journal, , vol. 36(1), pages 73-114, January.
    • Handle: RePEc:sae:enejou:v:36:y:2015:i:1:p:73-114
    DOI: 10.5547/01956574.36.1.4
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    References listed on IDEAS

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    1. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
    2. McPhail, Lihong Lu, 2011. "Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach," Energy Economics, Elsevier, vol. 33(6), pages 1177-1185.
    3. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
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