Simple analysis puts RFA's inflated claims in perspective
Posted June 9, 2011 in Moving Beyond Oil, Solving Global Warming
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.
|
Month |
CBOT ETHANOL Avg |
CBOT Ethanol Net VEETC |
NYMEX RBOB Gasoline |
Blending Margin |
Driver Benefit Per Gallon Ethanol |
Driver Benefit Per Gallon E-10 |
US Avg Retail Gasoline Price 2009 |
Consumer BTU Penalty Per E-10 Retail Gallon |
|
January |
$1.61 |
$1.27 |
$1.15 |
-$0.12 |
-$0.06 |
-$0.006 |
$1.79 |
$0.04 |
|
February |
$1.57 |
$1.23 |
$1.18 |
-$0.05 |
-$0.02 |
-$0.002 |
$1.92 |
$0.05 |
|
March |
$1.56 |
$1.22 |
$1.39 |
$0.17 |
$0.08 |
$0.008 |
$1.96 |
$0.05 |
|
April |
$1.57 |
$1.23 |
$1.44 |
$0.21 |
$0.10 |
$0.010 |
$2.05 |
$0.05 |
|
May |
$1.69 |
$1.35 |
$1.74 |
$0.38 |
$0.19 |
$0.019 |
$2.27 |
$0.06 |
|
June |
$1.73 |
$1.39 |
$1.95 |
$0.56 |
$0.28 |
$0.028 |
$2.63 |
$0.07 |
|
July |
$1.55 |
$1.22 |
$1.80 |
$0.58 |
$0.29 |
$0.029 |
$2.53 |
$0.06 |
|
August |
$1.59 |
$1.25 |
$2.02 |
$0.77 |
$0.38 |
$0.038 |
$2.62 |
$0.07 |
|
September |
$1.63 |
$1.30 |
$1.76 |
$0.46 |
$0.23 |
$0.023 |
$2.55 |
$0.06 |
|
October |
$1.89 |
$1.55 |
$1.90 |
$0.35 |
$0.18 |
$0.018 |
$2.55 |
$0.06 |
|
November |
$2.00 |
$1.67 |
$1.98 |
$0.31 |
$0.15 |
$0.015 |
$2.65 |
$0.07 |
|
December |
$1.92 |
$1.58 |
$1.93 |
$0.35 |
$0.17 |
$0.017 |
$2.61 |
$0.07 |
|
2009 AVERAGE |
$1.69 |
$1.36 |
$1.69 |
$0.33 |
$0.17 |
$0.017 |
$2.34 |
$0.06 |
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.
|
Average Benefit Per Driver |
Average BTU Penalty Per Driver |
Net 2009 Driver Impact |
|
$7.79 |
-$27.55 |
-$19.76 |
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.
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Comments
Geoff Cooper — Jun 13 2011 04:55 PM
Sasha,
Thank you for sharing the spreadsheet and some detail on your calculations. However, your simple analysis proves the old adage that garbage in means garbage out. As you might have guessed, we strongly disagree with your analysis and the assumptions and selective data you used.
Notwithstanding the fact that your whole approach is questionable, changing a few of the key assumptions dramatically alters the results, both in direction and magnitude. I have outlined our major points of disagreement below and would be very interested in your response to each.
1. First and foremost, your analysis makes no attempt whatsoever to account for the aggregate impact on gasoline prices of extending the crude oil supply with ethanol. Ethanol’s impact on gasoline prices goes far beyond simple blending economics and ethanol’s typical discount to gasoline at the wholesale level. Basic economic theory says that when you have two substitute goods (ethanol and gasoline) and the supply of one good (ethanol) increases relative to demand for both substitute goods, the price of both goods decreases. (Remember the butter and margarine example from Econ 101?) If you read the Du & Hayes papers, you undoubtedly saw that this is primarily the effect that they are modeling. Thus, when you add 13.2 billion gallons of ethanol to the crude oil supply, as we did in 2010, the price of gasoline is held lower than it would have been without the additional supply. Your analysis totally ignores this very important effect.
2. Please justify the assumptions that 75% of the value of VEETC went to gasoline blenders, and only half of that passed through to the pump. What is the statistical basis for those assumptions? Do you have some analysis that supports the use of those assumptions, or are they just arbitrary assumptions based on anecdote? And where does the 25% of VEETC that you assume went to ethanol producers show up in your analysis? You can’t just take that 11 cents and throw it out the window—it would be reflected somewhere in the supply chain. Further, it’s ironic that much of NRDC’s advertising around VEETC states emphatically that the tax credit goes entirely to Big Oil and no one else shares in the benefits. But here, when it works to your benefit to assume that some portion goes to the ethanol producer, you change your tact.
3. It is disingenuous and misleading to adjust the price of every gallon of ethanol based on energy content. Yes, the current supply of ethanol is larger than the demand for its valuable additive properties (octane and oxygen). But that doesn’t make it right to assume, as you have done, that every gallon only has value as BTU replacement. Even NRDC’s friends at EPRINC (a storefront group for Big Oil) acknowledge that as much as 500,000 barrels per day of ethanol demand (55% of current production) is driven by the fuel’s unique additive characteristics. Where would the octane and oxygen come from if we didn’t have ethanol?
4. It is not surprising that you chose the calendar year of 2009 for your spreadsheet analysis. Over the past four years, ethanol has rarely been priced above gasoline. In fact, only six of the past 48 months (12%) have seen average ethanol prices higher than gasoline prices at the rack. I’m sure you chose 2009 for the analysis because ethanol was selling at a premium to gasoline for the first several months of that year after oil prices had tanked—that reduced the blending margin and helped you skew the numbers. What if you ran the numbers for 2010? Or for the whole period of 2007-2010? I guarantee the results would look much different.
5. Your analysis further ignores the avoidance of “hidden costs” associated with oil imports that results from increased ethanol use. DOE’s Oak Ridge National Laboratory found in a 2006 study that every barrel of imported oil costs the U.S. economy an additional $13.58/bbl above and beyond the market price. Some estimates are far higher. The ORNL figure includes both a monopsony effect (the influence that the U.S has on world oil prices as the world’s largest consumer of crude oil) and a cost for macroeconomic disruptions to the U.S. economy.
The bottom line is that your “simple analysis” is just too simple, too skewed, and too full of arbitrary assumptions to be of any real value. Worst of all, your calculations blatantly ignore the most important impact ethanol has on gasoline prices (point #1 above). It’s a bit absurd that NRDC is using a one-tab Excel spreadsheet model and some questionable assumptions to try to dispute the results of a complex, peer-reviewed and published econometric model run by two highly regarded econometricians.