Impact of Ethanol Production on U.S. and Regional Gasoline Prices and On the Profitability of U.S. Oil Refinery Industry



The Impact of Ethanol Production on U.S. and Regional Gasoline Prices and
on the Profitability of the U.S. Oil Refinery Industry

Introduction

Fuel ethanol production in the United States increased from 1.63 billion gallons in 2000 to 7.22
billion gallons in 2007 (RFA). In comparison, the U.S. consumed approximately 146 billion
gallons of petroleum in 2007 (EIA). The purpose of this paper is to estimate the impact of this
increase in ethanol supply on the U.S. gasoline market.

Ethanol is blended with gasoline to improve octane and performance in about 50% of the
nation’s gasoline supply. Typically, a gallon of ethanol blend will have 10% ethanol and 90%
gasoline. This gallon of ethanol blend will contain approximately 97% of the energy of a gallon
of gasoline (Tokgoz et al. 2007) and will use approximately one-tenth as much fuel energy to
produce as it contains (Wang et al. 2007). Therefore, ethanol has essentially added to U.S.
gasoline supplies by utilizing solar energy to grow the crop, coupled with energy from natural
gas and coal to manufacture the farm equipment and fertilizer used in crop production.

In order to identify the separate impact of ethanol on gasoline prices, we need to separate the
impact of ethanol from the other forces driving gasoline prices. We do so by examining the price
of gasoline relative to the price of crude oil. We also estimate the impact of ethanol on the profits
made by refiners. Both estimates are calculated for the U.S. as a whole and for each of five
regions within the U.S. The motivation for conducting the regional analysis is that if ethanol is
affecting gasoline prices, then we hypothesize that this impact will be largest in the Midwest
where regional ethanol production and utilization is at its maximum.

The paper proceeds as follows. First, background information regarding previous work, relative
gasoline prices, and the use of the crack spread as a measure of industry profitability are
introduced. We then describe the five regional “Petroleum Administration for Defense Districts”
(PADDs) that are the basis for the analysis. Next, we present a detailed description of and



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