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Biofuels Policy and the Market for Motor Fuels: Empirical Analysis of Ethanol Splashing

by Walls, W. D., Rusco, F. and Kendix, M.

Low ethanol prices relative to the price of gasoline blendstock, and tax credits, have resulted in discretionary blending at wholesale terminals of ethanol into fuel supplies above required levels---a practice known as ethanol splashing in industry parlance. No one knows precisely where or in what volume ethanol is being blended with gasoline and this has important implications for motor fuels markets: Because refiners cannot perfectly predict where ethanol will be blended with finished gasoline by wholesalers, they cannot know when to produce and where to ship a blendstock that when mixed with ethanol at 10 percent would create the most economically efficient finished motor gasoline that meets engine standards and has comparable evaporative emissions as conventional gasoline without ethanol blending. In contrast to previous empirical analyses of biofuels that have relied on highly aggregated data, our analysis is disaggregated to the level of individual wholesale fuel terminals or "racks" (of which there are about 350 in the US). We incorporate the price of ethanol as well as the blendstock price to model the wholesaler's decision of whether or not to blend additional ethanol into gasoline at any particular wholesale city-terminal. The empirical analysis illustrates how ethanol and gasoline prices affect ethanol usage, controlling for fuel specifications, blend attributes, and city-terminal-specific effects that, among other things, control for differential costs of delivering ethanol from bio-refinery to wholesale rack.

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