Effects on Gasoline Demand in Canada and the United States of Increased Ethanol Use

1
Effects on Gasoline Demand in Canada and the
United States of Increased Ethanol Use

• By
• Christopher J. Nicol
• Kurt K. Klein
• with contributions by
• Maria Olar

2
Presentation Outline

• Why use ethanol?
• Modelling gasoline demand
• Some estimated elasticities
• Gasoline pricing breakdown
• Pricing effects of using E10
• Effect on gasoline demand of increasing ethanol
  content
• Implementation considerations

3
Why Use Ethanol?

• Greenhouse gas (GHG) emission reduction
• Pure, grain-based fuel implies 30-40 reduction
  E10 fuel implies 3-4 reduction (Natural
  Resources Canada, 2003).
• Cellulose-based fuel implies 60-80 reduction.
• Reduction level depends on proportion of ethanol
  in the fuel.
• Criteria air contaminant (CAC) effects
• Reduction in CO, volatile organic compounds
  (VOC), particulate matter (PM) and sulphur oxides
  (SOx).
• Increases in nitrogen oxides (NOx) and some
  VOCs.
• Increased vehicle efficiency
• Higher octane fuel.
• Engine-cleaning properties.
• Higher efficiency in burning.

4
Modelling Gasoline Demand

• A model of gasoline demand can be embedded in a
  complete demand system.
• We make use of estimated elasticities from a
  complete demand model developed for Canada and
  the United States
• The model (from Nicol, 2001) is a six-good demand
  system, controlling for a variety of important
  demand factors.
• The model has been used to compute gasoline
  elasticities of demand for Canada and the United
  States (Nicol, 2003).

5
Some Estimated Elasticities

• Canadian Estimates United States Estimates
• Atlantic -0.262 North East -0.275
• Québec -0.131 Mid West -0.409
• Ontario -0.158 South -0.361
• Prairies -0.167 West -0.293
• B.C. -0.224
• All -0.185 All -0.339

6
Gasoline Pricing Breakdown, Canada

• 2000
• City Crude Content Retail
• Halifax 26.7c 72.2c
• Montreal 27.5c 77.5c
• Toronto 28.0c 69.3c
• Edmonton 26.9c 64.1c
• Vancouver 27.9c 73.0c
• Source CPPI Fuel Facts, August 8, 2000

7
Gasoline Pricing Breakdown, Canada

• 2004
• City Crude Content Retail
• Halifax 33.8c 97.0c
• Montreal 34.5c 95.9c
• Toronto 35.9c 83.6c
• Edmonton 33.5c 85.6c
• Vancouver 34.8c 97.4c
• Source CPPI Fuel Facts, June 8, 2004

8
Gasoline Pricing Breakdown, United States

• 2000
• City Crude Content Retail
• Bangor,ME 26.7c 61.8c
• Buffalo,NY 28.0c 63.8c
• Minneapolis,MN 26.9c 55.8c
• Seattle,WA 27.9c 65.1c
• Source CPPI Fuel Facts, August 8, 2000

9
Gasoline Pricing Breakdown, United States

• 2004
• City Crude Content Retail
• Bangor,ME 33.8c 74.5c
• Buffalo,NY 35.9c 76.3c
• Minneapolis,MN 33.5c 72.4c
• Seattle,WA 34.8c 87.2c
• Source CPPI Fuel Facts, June 8, 2004

10
Pricing Effects With E10

• Production cost of corn-based ethanol, 35c/l
  (Baker, 1990).
• Break-even price of ethanol versus gasoline
  estimated at 28c/l (Government of Alberta, 2000).
• Minimum additional raw material cost of
  E10-based fuel at least 1c/l.
• At 2000 level gasoline prices, moving to E10
  increases fuel prices across Canada and the U.S.
  by 1.3-1.6 and 1.0-1.2 respectively, depending
  on region.
• At 2004 level gasoline prices, moving to E10
  increases fuel prices across Canada and the U.S.
  by 1.0-1.2 and 0.8-0.9 respectively, depending
  on region.

11
Effects on Gasoline Demand of Increased E10 Use

• Gasoline consumption, Canada, 2001, 36,902
  million litres.
• Gasoline consumption, United States, 2001,
  464,277 million litres.
• Based on estimated elasticities earlier, could
  see a reduction in gasoline demand in Canada of
  75.3 million litres.
• Based on estimated elasticities earlier, could
  see a reduction in gasoline demand in the U.S. of
  1416.1 million litres.

12
Implementation Considerations

• Ethanol production capacities in Canada and the
  U.S. are below that feasible to meet complete E10
  needs for each country.
• Tax treatment of the ethanol component of fuel
  differs in provinces across Canada and states
  across the U.S.
• Opposition of various sorts is likely in the
  event of a policy to promote increased E10 use.
• Although the increase in fuel price is modest,
  this in itself is likely to generate considerable
  opposition to policy-promoted use of E10.
• A comprehensive approach, looking at all aspects
  of a change, is likely to meet with more success.
• This work is preliminary, but the analysis
  suggests greater benefits might be available with
  a widespread movement to the use of E10.