A new study from energy policy expert Dr. Philip K. Verleger, Jr., has found that consumers save 22 cents on every gallon of gas thanks to the Renewable Fuel Standard. That’s a savings of nearly $5 every time you fill up, or $250 per American family every year. Additionally, the report demonstrates how renewable fuels enhance energy security and help act as a counterbalance to consolidation in the oil refining industry.

The Renewable Fuel Standard Program: Measuring the Impact on Crude Oil and Gasoline Prices looks at the impact of the Renewable Fuel Standard program (RFS) on crude oil and gasoline prices over the last four years (2015-2018). The findings highlight how the RFS has helped keep prices down at the pump by requiring oil refiners to blend a certain amount of renewable fuel into the fuel they produce.

Key Report Findings:

• The RFS program has provided economic benefits to consumers in the United States and worldwide. Retail gasoline prices are lower thanks to the program. The findings from an econometric analysis show that the savings to consumers resulting from the RFS averaged $0.22 per gallon from 2015 through 2018.
• The blending of approximately one million barrels per day of ethanol into U.S. motor fuels under the RFS over the 2015 through 2018 period has lowered the average price of crude by $6 per barrel.
• Because gasoline demand is price inelastic, consumers have been able to allocate a smaller percentage of their total consumption budget to fuel purchases. This has allowed them to expend more on other goods. Over four years, U.S. consumers have been able to spend almost $90 billion per year more on other goods because of gasoline prices being pulled down by renewable fuel use.
• If ethanol were eliminated from the fuel supply, as some opponents of renewable fuels have advocated, gasoline prices would surge by more than $1 per gallon.
• There have been 19 oil market disruptions over the last 46 years, starting with 1973’s Arab Oil Embargo. A modest amount of renewable fuels can significantly moderate the price impact of market disruptions. Renewable fuels can limit the process that pushes product prices higher. The suppliers of products, especially gasoline, can and will increase the amount of ethanol blended into motor fuels if the regulations allow and ethanol can be obtained at a favorable price.
• Consumers would likely pay even higher prices if the mergers that created the large oligopolistic independent refiners had not been accompanied by a second trend: the creation of an aggressive, competitive petroleum marketing sector.
• “The procedures used for introducing renewable fuels into gasoline allow the competitive petroleum marketing sector to counter the market power enjoyed by U.S. refiners. This independence allows the marketer to vary the amount of ethanol blended depending on the price.
• Consumers will see increasing benefits from lower prices as marketers are allowed to blend additional ethanol into gasoline (or other renewables into motor fuels) when the ethanol can be acquired at a discount to the price of the petroleum-based blendstock. The benefit results from the high level of competition in gasoline marketing and the absence of refinery control over marketers.

More About the Author: Dr. Philip K. Verleger, Jr.

Dr. Philip K. Verleger, Jr., has studied and written about energy markets for over forty years. The author of two books and numerous articles and papers on the evolution of energy markets, Dr. Verleger played a critical role in creating the oil futures markets.

After earning his Ph.D. in Economics from MIT in 1971, he went on to start his energy consulting career at the Ford Foundation Energy Policy Project and later served as a Senior Staff Economist on President Ford’s Council of Economic Advisers and Director of the Office of Energy Policy at the US Treasury in President Carter’s administration.

Dr. Verleger went on to become a Senior Fellow at the Peterson Institute for International Economics and served as the David E. Mitchell/EnCana Professor of Management at the University of Calgary’s Haskayne School of Business from 2008 to 2010.

Dr. Verleger now serves as a Senior Research Scholar and Lecturer at the School of Organization and Management at Yale University and as a Vice President in the Commodities Division at Drexel Burnham Lambert. He is also the owner and president of PKVerleger LLC.

Read more about Dr. Verleger here.

What Factors Drive Gas Prices?

There has been considerable discussion lately regarding the reasons for rising gasoline prices in the late winter and early spring of 2019, including the potential role of ethanol following the Midwest floods in March. However, according to an analysis released in April 2019 by the Renewable Fuels Association, the recent increase in gasoline prices is driven by:

• A surge in crude oil prices since the start of the year;
• Typical seasonal patterns in gasoline pricing, partially reflecting the changeover to summer specifications; and
• Refinery maintenance and unplanned outages.

Ethanol prices are at a steep discount to gasoline prices (and to other sources of octane), and inventories have recently been at record levels. While transportation challenges caused issues with delivery to isolated locations in the immediate aftermath of the floods, production was not significantly affected. In the vast majority of the country, ethanol has been helping to hold down gasoline prices for consumers. Read the full analysis here.