A university study released this week showed that the use of ethanol reduced the price of wholesale gasoline by $1.09 a gallon on average around the country. And here in Iowa, ethanol chopped a whopping $1.69 off the wholesale price, precisely because we use so much of the biofuel.
Here’s the best way to look at it: The price of gas today is around $3.40 a gallon in Iowa. But if we didn’t rely on ethanol that is made from corn and other renewal sources and makes up approximately 10 percent of our gasoline supply, the price probably would be more than five bucks a gallon. Ouch!
By saving consumers money at the gas station, ethanol is pumping more life into the entire economy. By saving at the pump, folks have more in their pockets to eat out, or to take in a movie or just pay for the things we buy every week, like groceries, prescriptions, and of course gas.
So why is ethanol such a good deal for consumers? It really goes back to the simple laws of supply and demand, says Dermot Hayes, an Iowa State University (ISU) economist, who conducted the study with Xiaodong Du of the University of Wisconsin.
The growth of ethanol production over the past decade essentially stretched America’s supply of gasoline by about 10 percent. And if you remember anything from Econ 101, it’s that increased supply translates into lower prices.
Ethanol has also helped consumers by stretching the country’s gasoline refining capacity, Hayes says. Prior to the growth of ethanol output over the last decade, gasoline refiners typically ran at capacity. So any shock to the system, such as hurricane or refinery shutting down for maintenance, would have jerked prices higher at the pump. Now, with ethanol providing a cushion in supply, those shocks have become very rare, the ISU economist says.
“It’s almost as if the refineries found a magic bullet with ethanol,” Hayes says.
And happily for American consumers, that magic bullet has shot a hole right into the heart of high gas prices.
Written by Dirck Steimel
Dirck is the news services manager for Iowa Farm Bureau.