The Ethanol Market: An Econometric Inquiry into the Market for E85

Abstract

This study analyzes the ethanol market in order to determine if E85 can replace gasoline as the United States primary fuel. After presenting the history of the ethanol market, past literature on ethanol, and legislation on ethanol, this study employs reduced form price and quantity equations along with a multiplicative heteroscedasticity approach to show that under current circumstances E85 will not replace gasoline in the United States. The main driver of E85 prices is the price of gasoline. Rising gasoline prices will significantly increase the price of E85. It was concluded that the price of E85 relative to gasoline may not change. This result coupled with increasing corn and soybean prices suggest that unless other feedstocks are discovered or there are significant advancements in technology which will greatly reduce the cost of ethanol and alleviate the strain on already existing feedstock markets, like corn, E85 will not replace gasoline as the United States primary fuel. The future of ethanol production may rest in the newly researched ethanol feedstock switch grass but there is currently no large scale production using switch grass. The president's impact on the ethanol market was explored in this study under the variable speeches but due to data constraints it proved to be statistically insignificant. The speeches variable is recommended for future studies involving the ethanol market.