Though Ethanol Might Appear ‘Cheaper’ Than Gasoline, Let’s Do The Math On Energy Content

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Though Ethanol Might Appear ‘Cheaper’ Than Gasoline, Let’s Do The Math On Energy Content
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Tempted by lower priced ethanol? Keep in mind that the corn-based moonshine contains 30% less energy by volume than gasoline.

But, and as my wife would say, it is a very big but, the price per gallon of ethanol is not better than the price of gasoline except by volume: ethanol contains about 30% less energy than gasoline and the price per gallon is thus misleading. Adjusting for this yields the figure below, which shows that ethanol in gasoline equivalent gallons is rarely cheaper than gasoline, typically 5% of the time.

While many are aware that oil price forecasts have been notoriously erroneous, few pay as much attention to demand projections. In theory, demand is easy to forecast: regress demand against income growth and prices, dataseries of which can be downloaded in seconds. Unfortunately, while future income/GDP is relatively foreseeable over the long-term, prices are less so.

The figure below shows historical EIA gasoline demand forecasts at various times and clearly those from the 2000s were far too optimistic, undoubtedly because price expectations proved too conservative. Somehow the NEM s model isn’t capable of predicting the collapse of the Venezuelan oil industry, the U.S. overthrow of Saddam Hussein, and the Arab Spring, all of which led to the high oil prices seen from 2004-2014. Tsk, tsk.But the problem is that Congress used those forecasts—given that they are the state of the art—in setting the ethanol mandate which, as a result, required blending levels beyond what was assumed.

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