According to a new report released Thursday, consumers could be paying as much as 8 cents a gallon less for gasoline if oil companies used lower-priced ethanol rather than higher priced petroleum components.
The Consumer Federation of America report, "Over a Barrel: Why Aren't Oil Companies Using Ethanol to Lower Gasoline Prices?" finds that oil companies are keeping gasoline supplies tight and prices high even though supplies of ethanol are plentiful and have dropped between 40 cents and 50 cents per gallon since the beginning of the year.
"The major oil companies are reaping huge windfall profits while consumers across the nation are facing the highest gasoline prices in recent memory," says Mark Cooper, CFA's Director of Research. "Oil companies in many parts of the country can easily blend ethanol, a high octane domestically produced renewable fuel, into gasoline, but have chosen not to. As a result consumers are paying more than they should for their gasoline."
"At the end of April," continues Cooper, "the average price of regular unleaded gasoline was $2.25 a gallon, 23% more than the same time last year. While crude oil accounts for some of the increase at the pump, so too did increasing margins and profits for domestic refining and marketing."
According to the report, for the 10 largest companies that refine crude oil in the U.S. profits increased by almost 60% in the first quarter of 2005 compared to the first quarter of 2004.
Cooper also pointed to oil company mergers which have increased the market power of a few companies that now dominate the industry. At the same, Cooper says "the ethanol industry has become less concentrated and more competitive."
According to Cooper, the reason why the major oil companies resist purchasing lower priced ethanol is simple. "The market is not competitive enough to force them to worry about price increases. They also do not own the ethanol. They prefer to process more crude oil and make more money by keeping the price up."
Cooper says that oil companies should not wait for mandated standards to provide consumers with lower gas prices. "Clearly input that is lower in price ought to be finding its way into the marketplace. And ethanol is," he says.
According to the report, with the availability of lower-priced ethanol in New York harbor, refiners could have lowered the wholesale price of gasoline in New Jersey (gasoline in New York already is blended with ethanol) by 5 cents to 7 cents a gallon in March. Similarly, if refiners increased the use of ethanol in California from 5.7% to 10%, the price would have been 8 cents a gallon lower.
"These potential cost savings to consumers (assuming refiners would pass them through to the retail level) represent only the arithmetic result of blending more lower cost ethanol with higher cost gasoline," adds Cooper. "The increase in available supplies could have an additional effect in lowering prices."
Sen. Tom Harkin, Senate Agriculture Committee ranking member, says this report clearly shows that "the better solution to our nation's energy future is found in renewable sources here at home rather than from importing more oil from the Middle East. I am hopeful this report will leave a lasting impression on leaders in Washington."
Based on this new study's findings, Harkin announced plans to ask the Department of Energy to investigate the reasons behind the very limited blending of ethanol into the nation's motor vehicle fuel supply. Currently, in the United States about 97% of transportation fuel comes from oil, with nearly two-thirds imported from foreign sources.