Simple Analysis Puts RFA's Inflated Claims in Perspective

In a post earlier this week, I talked about the Renewable Fuels Association’s new ad campaign in Washington D.C. promoting corn ethanol on the basis that it reduces gas prices. The claims in that ad—namely that ethanol reduced the average American household’s gasoline bill by more than $800 and that gas prices could rise by as much as 92% in the absence of ethanol—seemed especially exaggerated to us here at NRDC, given our own analysis of the costs and benefits of corn ethanol to American drivers.

As a follow up to that post, I wanted to provide some more detail on how we arrived at our estimates, given that we as taxpayers subsidize the domestic corn ethanol industry to the tune of $6 billion per year through the Volumetric Ethanol Excise Tax Credit or “VEETC”, which pays oil companies $0.45 cents for every gallon of corn ethanol they blend into our gasoline supply.

My earlier post referred to an analysis by Hart Energy Consulting, which does a lot of great and complex analysis, but the figures I cited are just basic math:

We’re currently close to getting about 10% of our light-duty vehicle fuel from ethanol, so we’re well beyond the specialty value that ethanol provided when we were only getting a small percentage of our fuel supply from ethanol. So when ethanol and gasoline are competing just on their volume value, we can assume that during periods when ethanol is cheaper than gasoline (i.e. the blending margin is positive), there is excess supply of ethanol and the oil companies can pocket more of the VEETC value. Conversely, when ethanol is more expensive than gasoline, ethanol supply is tight and ethanol producers are able to extract more of the VEETC value.

Based on 2009 relative prices for ethanol and gasoline, we estimated that roughly 25% of the VEETC value for the year went to ethanol producers, while the rest went to oil companies. We then assumed that half of what went to oil companies was passed through to consumers via reduced gas prices at the pump. This translated, on average, to $0.17 cents per gallon of ethanol or $0.017 cents per gallon of E10, a blend of 10% ethanol and 90% gasoline.

Next we factored in a “BTU penalty” of 2.5% to account for the hit on mileage drivers see because gasoline blended with ethanol has a lower energy content than gasoline made of all hydrocarbons, meaning drivers using E10 have to buy more gasoline overall to drive the same distance. On average, we calculated this penalty to be about $0.06 cents per gallon based on the average retail price of gasoline in 2009.  

Finally, we calculate what this translates to in benefits and costs to U.S. drivers. For this we take the Energy Information Administration’s estimate of total gasoline demand in 2009 and, controlling for average ethanol penetration across the country (roughly 70%), divide by the U.S. Census Bureau’s estimate of U.S. licensed drivers.

We find that on average, a U.S. driver saw $7.79 in benefit from having corn ethanol blended into our gasoline supply in 2009, but was hit with a $27.55 BTU penalty. The net result was that the average driver was actually penalized $19.76. (I actually reported this incorrectly on Tuesday when I said the benefit was $8.76 on average and the penalty was just $14.88).

These assumptions are simple and may be off by a little bit, but they’re a heck of a lot more realistic than assuming that all the ethanol will suddenly disappear. This simple analysis (see our spreadsheet here) shows just how inflated RFA’s claims are and how desperate the corn ethanol industry is in the face of mounting bi-partisan political opposition to corn ethanol subsidies.