Some interesting research coming out of MIT and UCAL Davis challenges claims by the biofuels industry that Renewable Fuel purchase mandates have resulted in enormous savings to fuel consumers.   Claimed savings have been massive, indeed.  Last month, energy economist Phil Verlager published an analysis concluding that

Crude oil today might easily sell at prices as high as or higher than in 2008. Preliminary econometric tests suggest the price at the end of August would have been $150 per barrel.

The implication for world consumers is clear. As noted in the August 2013 Petroleum Economics Monthly , the US renewable fuels program has cut annual consumer expenditures in 2013 between $700 billion and $2.6 trillion. This translates to consumers paying between $0.50 and $1.50 per gallon less for gasoline.

That's right:  as much as $2.6 trillion in savings every year.  In contrast, the few billion in subsidies sure look small.  These figures are included in an updated ad campaign (below) by the Renewable Fuels Association, a biofuels trade promotion group.

And Verlager is not alone in claiming very large economic impacts.  Using 2011 data, economists Dermot Hayes and Xiadong Hu of Iowa State University estimated average savings of $1.09 per gallon -- with savings in the mid-West region reaching as high as $1.69/gallon.  Their estimated savings over a longer period (2000-2011) were significantly lower, though, at about $0.29/gallon.

Economists Christopher Knittel (MIT) and Aaron Smith (UCAL Davis) reworked the estimation approach used by Hayes and Wu and found it had a number of problems.  They argued that a key metric (the crack ratio, or the price of gasoline divided by the price of oil) was over-generalized.  They also argued that the earlier paper suggested a causal relationship with ethanol and crack ratio movements, rather than mere correlation.  The Knittel and Smith analysis found a much smaller impact of ethanol blending mandates on prices to consumers.  Knittel noted in an interview with the MIT news office that

In the very short run, if ethanol vanished tomorrow, we would be scrambling to find fuel to cover that for a week, or less than a month.  But certainly within a month, increases in imports would relax or reduce that price impact.

The full paper can be accessed here.  There's a fair bit of interchange as well between Knittel and Smith, and Hayes, and this provides an interesting window into the methods of both parties:  Hayes 1Knittel and Smith 1Hayes 2

RFA Ad campaign touting large savings from ethanol

I expect that Knittel and Smith are much closer to the true impacts than either Hayes and Wu or Verlager.  The ethanol market share is simply too low to be causing shifts of such a large percentage of the market price.  Further, continuing shifts in fuel market structure are likely to weaken the marginal impact of ethanol on fuel prices relative to other factors.  These shifts include continued efficiency gains in the fleet, growing use of hybrids, ethanol fuel production above the blend wall, growing exports of refined fuels from the US, and increasing sources of oil. 

An important related point to this general discussion of price impacts is that one shouldn't claim savings in gas prices from blending mandates while ignoring the negative impacts that these mandates have on consumers in other ways.  For example, the ethanol subsidies (now dominated by the RFS) drive up the cost of animal feed and human food (the degree of which is another fiercely contested data point).  This is properly seen as an offset to whatever gains may exist at the pump.  There is also the direct cost of the subsidies themselves -- not only through biofuel support programs, but also from long-lived subsidy programs for irrigation and corn production are are increasingly being captured by the biofuels market segment as more and more crop ends up and fuel.   And globally, there are negative impacts on land use as artificially high prices for biofuel production displace other claims on the land ranging from different food crops to ecological uses.

Natural gas fracking well in Louisiana

A couple of stories related to energy innovation at the Massachusetts Institute of Technology have crossed my desk today, highlighting very different aspects of the school's role in trying to solve energy problems.  The first relates to a what many of us normally associate with MIT:  interesting, sometimes high risk, technology innovation.  This specific story involves a potential breakthrough in an area I've long thought of as a game changer for distributed power generation:  see-through solar.  Salvatore Salamone describes the technology in an article for RenewablesBiz:  thin film technology that can be added to existing glass surfaces at the time of window fabrication, but that allows much more of the visible light to pass through the pane than previous designs.  The approach is expected to dramatically reduce the manufacturing costs of the panels, as some of the highest cost elements are piggy-backed onto the manufacturing process already in place for conventional windows.  The main remaining problem is efficiency:  1.7% versus 12% for standard panels, though the researchers are confident that they can reach the 12%. 

The other story falls onto the darker side of innovation:  unauthorized use of intellectual property in a the prestigious MIT clean-energy prize contest, a violation that was a significant contributor in enabling the entrant to win a large cash prize.  Some weeks back, I wrote a blog post on the exciting invention by my cousin Jeff Koplow at Sandia National Laboratories.  The innovation, which he refers to as the "Sandia Cooler," allows for much more efficient cooling of industrial and commercial equipment than current cooling fan designs.  The winning team in MIT's clean energy prize contest this past May, CoolChip Technologies, is based on commercializing the new technology.  The only problem?  They didn't have a license for the technology -- though didn't make this clear in their presentation to contest judges and even included images of the Sandia innovation in their presentation without attribution.  They were awarded $200,000 in prize money, a victory that enabled them to enter into another contest to win an additional $100,000. 

The Chronicle of Higher Education has a more in-depth write-up of the issue.  What is surprising to me is that MIT officials have been downplaying the violations as a misunderstanding of the rules, and pretty much ignoring the ethical problems with the way the winning team presented the innovation.  From a straight commercial standpoint, this position is curious since MIT holds many, many patents and will lose out if they are not properly licensed. 

The commercial patent enforcement issue seems secondary to the ethical issues though.  Whether or not there has been a technical violation of the law or of the contest rules will be something battled out by MIT's lawyers and those at Sandia National Labs.  But starting new businesses, and particularly the way our premiere universities teach entrepreneurship, should always have ethical behavior at the core.  In that regard, MIT seems to be falling woefully short.

Update, September 19, 2011.  The controversy over the MIT clean energy contest finally reached the MIT school newspaper, The Tech, on September 16th.  In addition to providing a general overview of the issues, the article includes some rather pointed commentary from students, and in the comments section.  This framing seemed on-target:

Members of the community who have read the Chronicle article have drawn analogies between the Sandia-CoolChip situation and regular term papers at MIT. Term papers are also considered “academic exercises,” and any plagiarism in that context would, according to the MIT academic integrity website, lead to “failing the assignment, failing the course, and/or being suspended from the Institute or expelled.”