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Impact of Ethanol Mandates on Fuel Prices when Ethanol and Gasoline are Imperfect Substitutes

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  • Sebastien Pouliot
  • Bruce A. Babcock

Abstract

Past studies that examine the impact of ethanol mandates on fuel prices make the assumption that ethanol and gasoline are perfect substitutes because they are both sources of energy in transportation fuels. These studies, however, have been of limited use in informing current policy debates because the short- to medium-run reality is one of strong regulatory and infrastructure rigidities that restrict how ethanol can be consumed in the United States. Our objective here is to improve understanding of how these rigidities change the findings of existing studies. We accomplish this by estimating the impacts of higher ethanol mandates using a new open-economy, partial equilibrium model of gasoline, ethanol, and blending whereby motorists buy one of two fuels: E10, which is a blend of 10 percent ethanol and 90 percent gasoline, or E85 which is a high ethanol blend. The model is calibrated to recent data to provide current estimates. We find that the effects of increasing ethanol mandates that are physically feasible to meet on the price of E10 are close to zero. This result is robust to different gasoline supply elasticities and gasoline export demand elasticities. The impact of the size of the corn harvest on E10 prices is much larger than the effects of mandates. Increased mandates can have a large effect on the price of E85 if the mandates are increased to levels that approach consumption capacity. These findings show that concern about the consumer price of fuel do not justify a reduction in feasible ethanol mandates.

Suggested Citation

  • Sebastien Pouliot & Bruce A. Babcock, 2014. "Impact of Ethanol Mandates on Fuel Prices when Ethanol and Gasoline are Imperfect Substitutes," Center for Agricultural and Rural Development (CARD) Publications 14-wp551, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    • Handle: RePEc:ias:cpaper:14-wp551
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    References listed on IDEAS

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    5. Bruce A. Babcock, 2013. "Ethanol without Subsidies: An Oxymoron or the New Reality?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(5), pages 1317-1324.
    6. Pouliot, Sébastien, 2013. "Arbitrage between ethanol and gasoline: evidence from motor fuel consumption in Brazil," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150964, Agricultural and Applied Economics Association.
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    8. Pouliot, Sébastien & Babcock, Bruce A., 2014. "The demand for E85: Geographical location and retail capacity constraints," Energy Economics, Elsevier, vol. 45(C), pages 134-143.
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    Cited by:

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    2. de Gorter, Harry & Drabik, Dusan, 2015. "The Distinct Economic Effects of the Ethanol Blend Wall, RIN Prices and Ethanol Price Premium due to the RFS," Working Papers 250020, Cornell University, Department of Applied Economics and Management.
    3. Machado Neto, Pedro Augusto, 2021. "Why Brazil imports so much corn-based ethanol: The role of Brazilian and American ethanol blending mandates," Renewable and Sustainable Energy Reviews, Elsevier, vol. 152(C).

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    More about this item

    Keywords

    Biofuel; Ethanol; Gasoline; Mandate. JEL codes: Q18; Q41; Q42.;
    All these keywords.

    JEL classification:

    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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