On August 7th, the Consumer Federation of America released an anlysis
by Dr. Mark Cooper, CFA’s Director of Research, submitted to the
Environmental Protection Agency which concluded that “slashing ethanol
production, as requested by the state of Texas in its request for a
Waiver of the Clean Air Act Renewable Fuel Standard (RFS), would
increase gasoline prices substantially.” Dr. Cooper’s analysis was
filed in response to a study prepared for the state of Texas by oil
economists Phillip K. Verleger and Darrel B. Chodorow “who erroneously
claimed increasing demand for gasoline and crude oil would lower
prices,” according to Cooper.

Because Dr. Cooper’s analysis was released just as the EPA was
announcing its decision to deny Governor Perry’s waiver request, most
news reports failed to appreciate the stunning findings that consumers
are far better off economically with having increased amounts of
ethanol in the gasoline market.

Cooper criticized the claim made by Verleger and Chodorow that by
reducing ethanol production, gasoline and diesel prices would fall as
refineries increased processing of crude oil. Said, Cooper, “The
suggestion that increasing demand for oil will lower oil and gasoline
prices is not only contrary to Economics 101 and what independent
analysis by Wall Street firms, government agencies, and academic
institutions have concluded, but the study’s authors do not provide
one shred of evidence to support their strange argument.”

Cooper points to “the more likely impact will be to increase [gasoline
and oil] imports.” Cooper also demolished the Verleger/Chodorow claim
that refiners would increase refinery capacity to manufacture
additional gasoline. On the contrary, said Cooper:

If a deficit of refining capacity is needed to stimulate increased
refinery capacity, then the industry has had a strong incentive to add
capacity for the past decade and a half. The industry has failed to
increase refinery capacity to keep pace with growing demand,
preferring to raise its margins in a tight market and meet the
shortfall with increasing imports. There has been a deficit of at
least 3 million barrels per day for a dozen years and the industry did
nothing to reduce it. Reducing ethanol output would simply return the
industry to the tighter market condition that it prefers, so it can
raise the domestic spread and prices. (Emphasis added)

Finally, Cooper criticized Verleger/Chodorow for ignoring “the effect
that ethanol production has had in lowering gasoline prices (Emphasis
added). Other analysts have concluded that ethanol production lowers
gasoline prices in the U.S. and crude oil prices globally. If ethanol
costs less than gasoline, then blending it into fuels should lower the
price. While that effect is obvious, it is the least important effect
that ethanol has on the gasoline market. There are two other effects
that are much larger; ethanol lowers the margins in the refining
sector and it puts downward pressure on the price of crude.”
Click here to view the report from Dr. Cooper.
http://www.goodfuels.org/2008/08/slash-ethanol-raise-gas-prices/ .