Christopher Knittel, William Barton Rogers Professor of Energy and a professor of applied economics at the Massachusetts Institute of Technology (MIT) Sloan School of Management, and economist Aaron Smith of the University of California at Davis published research at the MIT News website on Oct. 10, 2013, that indicates the addition of ethanol to gasoline has not reduced the cost of gasoline as predicted by energy experts and the United States government. The research will be published in an upcoming edition of The Energy Journal.
The expected reduction of the wholesale cost of gasoline by $0.89 to $1.09 per gallon has not been realized in the last ten years.
The difference between reality and expectation centers on a quantity called the “crack ratio” that is used by energy economists to quickly evaluate the relative value of gasoline compared to oil. The crack ratio is the price of gasoline divided by the price of oil.
If ethanol reduced the cost of gasoline the crack ratio would have fallen over time. The crack ratio has not decreased to any great degree since 2000 when the researchers began their analysis.
The predicted and as of yet unrealized reduction in the price of gasoline with increasing amounts of ethanol was based on a flawed assumption about the crack ratio.
The most recent average cost of a gallon of gas in the United States according to the U. S. Energy Administration was $3.495. The cost of a 50 gallon barrel of crude oil was $103 on Oct. 10, 2013 according to an ABC News analysis. Ethanol is trading around $2.50 per gallon according to the Progressive Farmer website.
The relative improvement in the economy of the United States has increased demand for gasoline and the present government shutdown has also increased gas prices as the market reacts to expectations of a U. S. default.
The researchers emphasize that any expectations of a reduction in gas prices through the use of ethanol will not be realized.