Christopher Knittel: Claims of ethanol’s effect on gasoline prices based on flawed models

MIT Sloan Prof. Christopher Knittel

A few years ago, I was a bit skeptical when I heard some of the claims being made by supporters of the ethanol industry about how that corn-based fuel was reducing the price of gasoline. But it was only when I took a trip to Washington with my son and I saw some ads that were making even bigger claims that I decided that the truth had to get out.

Right now, Congress is debating the nation’s renewable fuel standard which, among other things, has helped spur a sharp increase in the production of ethanol. To help make their case, the trade group for the U.S. ethanol industry has been citing studies that claim that ethanol production reduced gasoline prices by 89 cents in 2010 and by $1.09 in 2011. Pretty powerful stuff. Except it’s wrong.

A paper I just co-authored for the MIT Center for Energy and Environmental Policy Research finds that the models used to produce those claims are “driven by implausible economic assumptions and spurious statistical correlations.” In fact, we find that the effects of ethanol production on gas prices are near zero and statistically insignificant.

To prove our point, we used the same statistical models used to produce the gas claims to “explain” variables that have no relationship to ethanol production. So, for instance, had we eliminated ethanol in 2010, natural gas prices would have risen by 65 percent and unemployment would have dropped by 60 percent in the U.S.  Obviously, anyone using such models to advocate eliminating ethanol production to end the Great Recession would be greeted by extreme skepticism. Similar skepticism should apply to the claims drawn from these same models about the effect of ethanol on gasoline prices.

Ethanol may have some benefits. But public policy should be based on real claims, not make-believe ones.

Read more in the New York Times and at Global

Christopher Knittel is the William Barton Rogers Professor of Energy Economics at MIT Sloan School of Management

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