The Impact of Ethanol Production on U.S. and Regional Gasoline 

Markets: An Update to 2012 

Xiaodong Du and Dermot J. Hayes 

Working Paper 12-WP 528 

May 2012 

Center for Agricultural and Rural Development 

Iowa State University 

Ames, Iowa 50011-1070 

www.card.iastate.edu 

Xiaodong Du is an assistant professor in the Department of Agricultural and Applied Economics, 

University of Wisconsin-Madison. Dermot Hayes is a professor of economics and of finance at Iowa State 

University. 

Acknowledgments: We acknowledge the Renewable Fuels Association (RFA) for their financial support. 

The views expressed in this paper are those of the authors and do not necessarily represent the 

Renewable Fuels Association. 

This paper is available online on the CARD Web site: www.card.iastate.edu. Permission is granted to 

excerpt or quote this information with appropriate attribution to the authors. 

Questions or comments about the contents of this paper should be directed to Xiaodong Du, 405 Taylor 

Hall, University of Wisconsin, Madison. Ph: (608) 262-0699; E-mail: xdu23@wisc.edu, or Dermot Hayes, 

578 Heady Hall, Department of Economics, Iowa State University, Ames, IA. Ph: (515)294-6185; E-mail: 

dhayes@iastate.edu . 

Iowa State University does not discriminate on the basis of race, color, age, religion, national origin, sexual orientation, gender 

identity, genetic information, sex, marital status, disability, or status as a U.S. veteran. Inquiries can be directed to the Director of 

Equal Opportunity and Compliance, 3280 Beardshear Hall, (515) 294-7612."
Abstract 

We update the findings of the impact of ethanol production on U.S. and regional gasoline 

markets as reported previously in Du and Hayes (2009 and 2011), by extending the data to 

December 2011. The results indicate that over the period of January 2000 to December 2011, the 

growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average 

across all regions. The Midwest region experienced the biggest negative impact of $0.45/gallon, 

while the regions of East Coast, West Coast, and Gulf Coast experienced negative impacts of 

similar magnitudes around $0.20/gallon. Based on the data of 2011 only, the marginal impacts 

on gasoline prices are found to be substantially higher given the increasing ethanol production 

and higher crude oil prices. The average effect across all regions increases to $1.09/gallon and 

the regional impact ranges from $0.73/gallon in the Gulf Coast to $1.69/gallon in the Midwest. 
1

Introduction 

The impact of US ethanol production on national and regional gasoline prices has been evaluated 

in Du and Hayes (2009 and 2011). Du and Hayes (2009) was based on data that was available 

prior to 2008. The results were updated in Du and Hayes (2011) using the data of January 2000-

December 2010. Since then, US transportation fuel markets, including ethanol and gasoline 

markets, have experienced significant changes. Average crude oil price increased from about 

$80/barrel in 2010 to about $95/barrel in 2011. Correspondingly, average U.S. wholesale 

gasoline prices have risen 30% from 2010-2011. A wider than normal price differential between 

ethanol and gasoline prices provides further economic incentives for ethanol production and 

consumption, which reached approximately 13.9 billion gallons by the end of 2011 (see Figure 

1). The purpose of this report is to update the earlier analysis using an additional year of 

historical data. 

We calculate the average impact of ethanol production both nationally and regionally over the 

period of January 2000-December 2011 and specifically for 2011. Estimation results indicate 

that on average, over the whole sample period and all five PADDs (Petroleum Administration for 

Defense Districts), the growth in ethanol production reduced wholesale gasoline prices by 

$0.29/gallon. The Midwest region (PADD II) experienced the biggest negative impact of 

$0.45/gallon, while the other regions such as East Coast (PADD I), West Coast (PADD V), and 

Gulf Coast (PADD III) had similar negative impacts around $0.20/gallon. Based on the data of 

2011 only, the marginal impacts on gasoline prices are found to be substantially higher given the 

dramatic increase in ethanol production and higher crude oil prices. The national average effect 

increases to $1.09/gallon and the regional impact ranges from $0.73/gallon in the Gulf Coast to 

$1.69/gallon in the Midwest. 

The impact of ethanol production on wholesale gasoline prices 

Here we briefly describe the updates and changes to Du and Hayes (2009 and 2011). In the 

current study, we extend the sample period to January 2000-December 2011. 
2

Dependent variables 

As in the previous studies, two dependent variables, the crack ratio and the crack spread, are 

employed. 

(a) The crack ratio ( CR ) is defined as the relative gasoline price to the price of crude oil, 

(1) *42 /  CR G O  P P

where PG is the average wholesale gasoline price ($/gallon), and PO is the U.S. crude oil 

composite acquisition cost to refiners ($/barrel). 

(b) The crack spread ( CS ) represents the refinery’s profit margin and is defined as the price 

differential between the crude oil and refinery products, 

(2) 2 1 *42 *42

3 3

 CS G H O  P PP

where PH is the wholesale price of No. 2 distillate fuel ($/gallon). The crack spread is deflated 

by the Producer Price Index (PPI) of crude energy material. Monthly data of all related prices are 

collected from Energy Information Administration (EIA) website. 

Explanatory variables 

As described in Du and Hayes (2009), explanatory variables include monthly U.S. ethanol 

production, monthly seasonal dummies (January to November), monthly crude oil ending stocks 

(excluding the Strategic Petroleum Reserve (SPR)), total motor gasoline ending stocks, 

complexity-adjusted refinery capacity, the HHI index representing regional refinery market 

concentration, dummy variables for September and October 2005 representing the unexpected 

supply disruptions induced by Hurricanes Katrina and Rita, and regional gasoline imports. Du 

and Hayes (2009) provides justifications for the included variables. 

Estimation 

A fixed-effects panel data model is specified as 

(3) ' 1,..., ; 1,... .    it i it it     X i Nt T            
3

where 1,..., i N  denotes the cross-section dimension, the PADD regions, and 1,... t T  denotes 

the time-series dimension.  it is the crack ratio (crack spread) on the i th region for time period 

t . Xit is the K-dimensional vector of explanatory variables listed above. 

The parameter estimates for the crack ratio and crack spread are reported in Table 1. All 

explanatory variables have the expected signs and largely consistent with previous studies. 

Evaluating at the sample mean, the wholesale gasoline price is lowered by $0.29/gallon due to 

ethanol production. This is equivalent to a 17% reduction over what gasoline prices would have 

been without ethanol production. 

We use the crack ratio to quantify the gasoline price impact. Specifically, the change of 

wholesale gasoline price, -0.29/gallon, is calculated as: 

 

Price change estimated coefficient Average ethanol production Average crude oil price ($/gallon) 

57.10 ($/barrel) = -0.0000175 12324.61 

42

 = 

 

 

 

 -0.2932 ($/gallon)

where the sample average ethanol production and crude oil price are employed. 

Regional analysis 

The crack ratio is employed as the dependent variable for the regional analysis. Ordinary Least 

Squares (OLS) estimation results are reported in Table 2. The results indicate that ethanol 

production has a significant and negative effect on wholesale gasoline prices in all regions. The 

Midwest has the largest impact of $0.45/gallon. The other regions such as East Coast, West 

Coast, and Gulf Coast experience negative impacts of similar magnitude on gasoline prices, 

which is around $0.20/gallon. The Rocky Mountain region has a $0.30/gallon reduction in 

wholesale gasoline prices. The impacts are estimated based on the data for the whole sample 

period. The change of gasoline price in a regional market, for example, $0.45/gallon in the 

Midwest region (PADD II), is calculated as 
4

 

Price change estimated coefficient Average ethanol production Average crude oil price ($/gallon)

57.10 ($/barrel) = -0.000027 12324.61 

42

 = 

  

 

-0.4524 ($/gallon)

Basing only on the data of 2011, we calculate the marginal impact of increasing ethanol 

production on wholesale gasoline prices. We find that the average effect across regions increases 

to $1.09/gallon and the regional impact ranges from $0.73/gallon in the East Coast to 

$1.69/gallon in the Midwest. The average and marginal effects of ethanol production on the US 

and regional markets are summarized in Table 3. 

Why do the regional impacts vary so much? 

In our original analysis we had hypothesized that the impact of national production ethanol 

should have had a greater impact on PADDs where ethanol penetration is greatest and we used 

the larger estimated impact in the Midwest as evidence in support of the ethanol impact 

hypothesis. The PADDs are also very different in terms of their economic conditions, oil and 

petroleum characteristics, oil related pipeline infrastructure, and local product supply and 

demand conditions. Therefore one would expect different gasoline price impacts for each region, 

especially because we estimate different parameters for each region. 

Because of its high population density, the East Coast (PADD I) has the highest demand for 

refined products in the country, but it has very limited refinery capacity. Its regional demand is 

largely satisfied by the Gulf Coast and by foreign imports. The Midwest PADD II is distinct in 

its coexistence of a highly industrialized section and a rural agricultural section. Much of the 

crude oil used in the Midwest is piped in from the Gulf Coast and Canada. The Gulf Coast region 

(PADD III), including Texas, Louisiana, New Mexico, Arkansas, Alabama, and Mississippi, 

produces over 50% of the nation’s crude oil and 47% of its final refined products. This region 

also serves as a national hub for crude oil and is the center of the pipeline system. It also exports 

gasoline. The Rocky Mountain region, or PADD IV, has the smallest and fastest-growing oil 

market in the U.S. With only 3% of national petroleum product consumption, it has the lowest 

ethanol penetration. The West Coast region, PADD V, is independent of other regions since it is 

geographically separated by the Rocky Mountains. In addition, the refinery market of this region 
5

is highly concentrated. Given this regional differentiation in our explanatory variables, it is not 

surprising that we end up with different estimates of the impact of ethanol. 

Why are the 2011 results so large? 

The results for 2011 are very large. These results may be questionable because we multiply a 

mean coefficient that is estimated over the entire sample period against data that is specific to the 

end of the sample period. We can be much more confident in the statistical accuracy of the 

estimated average impact but this estimate is not relevant to the current debate because ethanol 

production has surged since the mid point of the historic data. With higher crude oil price and 

expanding ethanol production, the marginal impact of ethanol growth on gasoline prices 

becomes increasingly pronounced. 

The surge in ethanol production in recent years has essentially added 10% to the volume of fuel 

available for gasoline powered cars and in so doing it has allowed the US to switch from being a 

major importer of finished gasoline to a major exporter of both gasoline and ethanol. Countries 

that switch trade patterns in this way will see dramatic price impacts because internal prices 

switch from world prices plus transportation costs to world prices minus transportation costs. In 

the early period, the US gasoline price had to be equal to the EU gasoline price plus the costs of 

transporting the gasoline from the EU to the US. Now that ethanol has allowed the US to reverse 

this trade pattern, US prices are lower than EU gasoline prices by an amount equal to 

transportation costs. In this context a $1.09 per gallon marginal impact for 2011 seems 

reasonable. 

How does the lower energy density of ethanol affect the results? 

The gasoline price that we use is the “Wholesale/Resale Price by Refiners” taken from EIA 

website. These prices are averaged over grade (regular, midgrade and premium) and formulation 

(conventional, oxygenated, and reformulated). This is the wholesale gasoline that retailers buy. 

Since these are finished motor gasolines, not the gasoline blendstock, the price will already 

include ethanol where it is blended. Ethanol has lower energy content per gallon than gasoline 

and this raises the question of how our results might differ on a cost-per-mile basis reflecting the 

slightly lower energy content of ethanol-blended gasoline compared to unblended gasoline. . 
6

According to EPA, “the theoretically expected decrease in fuel energy as a result of oxygenate 

use is in the 2% to 3% range when compared to gasoline. This corresponds to 0.5 to 0.8 miles per 

gallon for a car that averages 27 miles per gallon.”1

 This means a driver using ethanol-blended 

gasoline would have to fill up his car slightly more often in order to travel the same distance as 

he would if he were using unblended gasoline. Using a gasoline price of $3.50 per gallon, a 2.5% 

reduction in energy value would equate to $0.087 per gallon. In theory, this means a gallon of 

gasoline blended with 10% ethanol would need to be priced at $3.41 per gallon to provide the 

same cost per mile as a gallon of unblended gasoline priced at $3.50 per gallon. However, 

ethanol is blended with gasoline primarily for its additive properties, such as boosting octane and 

oxygen content, not strictly as a source of energy for combustion. Regardless, the impact of 

ethanol’s lower energy content on gas prices is much smaller than the price impacts we have 

measured and does not change the overall conclusions of our analysis. . 

References 

Du, X., and D.J. Hayes. 2009. The impact of ethanol production on US and regional gasoline 

markets. Energy Policy 37: 3227-3234. 

Du, X., and D.J. Hayes. 2011. The impact of ethanol production on US and regional gasoline 

markets: an update to May 2009. CARD Working Paper 11-WP 523. Center for Agricultural 

and Rural Development, Iowa State University. 

                                                            

1 See (http://www.epa.gov/otaq/regs/fuels/ostp-3.pdf)
7

Table 1. Estimation results for the fixed effects model on the crack ratio and crack spread 

Variable Crack Ratio Crack Spread 

Estimate Std. Err. Estimate Std. Err. 

Oil stock 3.05e-06*** 5.66e-07 6.89e-05*** 1.10e-05 

Gasoline stock 1.78e-06 1.58e-06 -2.11e-05 3.08e-05 

Equivalent Refinery capacity 2.71e-06 2.30e-6 1.36e-04*** 4.48e-5 

Ethanol production -1.75e-5*** 6.97e-07 -.00016*** 1.36e-05 

Supply disruption .09** .04 .15 .71 

Gasoline import/export -8.26e-6** 2.28e-06 -1.70e-4*** 4.45e-05 

HHI 2.60e-5 3.31e-5 0.001 0.0006 

January 0.01 .02 0.15 .39 

February 0.02 .02 0.74* .39 

March .09*** .02 1.85*** .39 

April .14*** .02 2.92*** .39 

May .17*** .02 3.51*** .39 

June .12*** .02 2.77*** .39 

July .08*** .02 2.18*** .39 

August .08*** .02 2.66*** .39 

September .08*** .02 3.11*** .39 

October .05** .02 2.34* .40 

November .01 .02 0.71 .39 

 

Note: Single (*), double (*), and triple (***) asterisks denote significance at the 0.10, 0.05, and 0.01 levels, 

respectively. 

     
8

Table 2. Regression results for the crack ratio with individual PADD regional data 

Variable PADD I PADD II PADD III PADD IV PADD V 

Oil stock 3.99e-6 6.78e-6*** 2.04e-6*** 2.51e-5 4.01e-6 

Gasoline stock -5.78e-6** -5.57e-6 2.15e-6 -2.50e-5 2.34e-7 

Refinery capacity -1.92e-5** 1.11e-5 -1.17e-6 2.41e-5 -6.15e-5*** 

Ethanol production -.0000121*** -0.000027*** -.0000116** -.0000178** -.0000138** 

Supply disruption .18*** 0.04 .19** .13 .05 

Gasoline import/export -3.45e-6 .0005** -1.59e-5 .004** .00003 

HHI -.0001*** -.0003 -.00005 .0003* .00004 

January .04 .06 .02 .01 .02 

February .01 .04 .02 .04 .06 

March .05 .07 .06 .09* .16*** 

April .11*** 0.10** .10*** .12** .19*** 

May .15*** .17*** .12*** .19*** .18*** 

June .10** .13*** .07** .16*** .13** 

July .06 .07* .04 .12*** .09 

August .02 .09** .04 .13*** .09 

September -.009 .09** 0.03 .15*** .11* 

October -.03 .04 0.002 .08* .08 

November -.02 .001 -.002 .04 .04 

Constant 2.25*** 1.25*** 1.06*** .91 3.15*** 

R2 .69 .71 .61 .69 .63 

 

Note: Single (*), double (*), and triple (***) asterisks denote significance at the 0.10, 0.05, and 0.01 levels, 

respectively. 
9

Table 3. The negative impact of ethanol production on wholesale gasoline prices (in $/gallon) 

 Average 

across 

regions 

PADD I 

(East 

Coast) 

PADD II 

(Midwest) 

PADD III 

(Gulf 

Coast) 

PADD IV 

(Rocky 

Mountain) 

PADD V 

(West 

Coast) 

Average effect 

(based on 

monthly data 

of 01/2000-

12/2011) 

0.29 0.20 0.45 0.19 0.30 0.23 

Marginal 

effect (based 

only on data of 

2011) 

1.09 0.76 1.69 0.73 1.11 0.86 

 
10

Figure 1. U.S. historical ethanol production (in billion gallons), 1980-2011.