Report: Maintaining the RFS would not increase retail gas prices

By Erin Voegele | January 27, 2014

A recent analysis published by economists with Iowa State University’s Center for Agricultural and Rural Development determined that maintaining the renewable fuel standard (RFS) would not result in higher retail fuel prices for customers. The report, titled “Impact of Increased Ethanol Mandates on Prices at the Pump,” was authored by professors Sebastien Pouliot and Bruce Babcock.

The analysis points out that one argument made by the oil industry over the RFS focuses on compliance costs, which Big Oil says will be passed onto consumers. Pouliot and Babcock note that the argument seems reasonable because that type of cost increase in any economic model tends to lead to higher gasoline prices, resulting in higher consumer prices. In their analysis, however, Pouliot and Babcock account for increased E85 consumption, which they call the most likely compliance path that would be taken in 2014 to meet increased ethanol manages.

According to the report, the analysis revealed two direct impacts of a binding ethanol mandate. First, it would increase the wholesale price of gasoline because positive renewable identification number (RIN) prices increase the cost of producing gasoline. Second, Pouliot and Babcock said there is a decrease in the ethanol price paid by blenders net of the RIN. “Because most U.S. consumers buy E10, the lower price of ethanol in the blend offsets at least some portion of the increased gasoline price. In addition to these two direct effects on the price of E10, there exists an indirect effect that works to lower E10 prices. To meet mandates beyond E10 requires an increase in E85 consumption, which results in a decrease in E10 consumption because some owners of flex vehicles switch fuels. The effect of substituting E85 for E10 is a net decrease in gasoline demand, which results in some reduction in wholesale gasoline prices. Whether the net effect of these three market forces results in a net increase or decrease in E10 pump prices requires the development of an economic model to sort out,” they wrote in the report.

That economic model shoes that increases in the 2014 ethanol mandate would cause E10 prices to decline slightly. “That is, even though increased mandates increase gasoline prices, the offsetting effects from a decline in ethanol price and movement by motorists to E85 from E10 are enough to result in a net decrease in the price of E10,” wrote Pouliot and Babcock.

Bob Dinneen, president and CEO of the Renewable Fuels Association, said the study puts to bed the argument that higher RIN prices will result in higher gas prices if the RFS is remains in place. “The RFS is working as intended. It’s time for our country’s leaders to take a good hard look at ethanol and realize the positive impact it has on our environment, our economy, and our consumers. The new CARD analysis takes the gas price fear out of the equation,” he said.

A full copy of the paper can be downloaded from the CARD website.