New research from MIT has found the use of ethanol in gasoline does not significantly lower the price of gasoline. Former research had suggested a significant decrease in the price of gasoline due to ethanol, but it was found to be “a correlation being interpreted as a causal relationship.”
The research had suggested the use of ethanol to lower gasoline by $0.89-$1.09, but these figures have been misconstrued. MIT explains how this could be misinterpreted. The prior research includes what economists call the “crack ratio.” This is the price of gasoline divided by the price of oil. The idea is if ethanol were a cheap component of gasoline, this would lower the crack ratio.
This is because there are other factors that contribute to the refinement of oil into gasoline. Researchers now realize the ethanol component merely contributed to the crack ratio, but did not make a significant impact on the price of gasoline. Researchers Knittel and Smith also did “anti-tests,” or inserting unconnected variables to see if there are any false correlations.
This is not to say ethanol shouldn’t be used in gasoline refinement, but the discussions about ethanol need to be more accurate. Ethanol certainly has its benefits, but blowing it up to large proportions only sets up policymakers for disappointment,” says Christopher Knittel, the William Barton Rogers Professor of Energy and a professor of applied economic at the MIT Sloan School of Management. However, if ethanol doesn’t significantly affect the price of gasoline now, it may in the future. Currently, corn ethanol constitutes around 10% of US gasoline, up from about 3% in 2003.
