Ethanol Production and Gasoline Prices: A Spurious Correlation
Name
2012-006.pdf
Description
main article
Size
1.18 MB
Format
Adobe PDF
Checksum (MD5)
5a0fbe7d38c008643e982dfb5065672f
Author(s)
Knittel, Christopher
Smith, Aaron
Date Issued
July 2012
Publisher
MIT CEEPR
Citation
CEEPR-WP-2012-006
Series/Report no.
CEEPR Working Papers;2012-006
Abstract
Ethanol made from corn comprises 10% of US gasoline, up from 3% in 2003. This
dramatic increase was spurred by recent policy initiatives such as the Renewable Fuel
Standard and state-level blend mandates, and supported by direct subsidies such as the Volumetric Ethanol Excise Tax Credit. Some proponents of ethanol have argued that
ethanol production greatly lowers gasoline prices, with one industry group claiming it
reduced gasoline prices by 89 cents in 2010 and $1.09 in 2011. The estimates have
been cited in numerous speeches by Secretary of Agriculture Thomas Vilsack. These
estimates are based on a series of papers by Xiaodong Du and Dermot Hayes. We
show that these results are driven by implausible economic assumptions and spurious
statistical correlations. To support this last point, we use the same statistical mod-
els and find that ethanol production "decreases" natural gas prices, but "increases"
unemployment in both the US and Europe. We even show that ethanol production
"increases" the ages of our children.
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