Relationship between ethanol and gasoline: AIDS approach

- This paper estimates the responsiveness of ethanol use to gasoline prices.
- Using AIDS estimation we find that the results differ before vs during ethanol expansion.
- Ethanol was a substitute for gasoline in the pre-expansion period (1982-2005).
- However, the relationship became complementary in the expansion period (2006-2012).
- Our findings suggest that the ethanol consumption in the U.S. has reached capacity.

Ethanol production in the United States has increased significantly due to government support, which has begun to dwindle. Ethanol now seems to compete with gasoline for vehicle fuel but because ethanol is mostly sold as a blend, gasoline and ethanol could be complementary fuel sources. The study investigates the true relationship between these fuels since it has policy implications. Results of LA/AIDS estimation show the two fuels were substitutes before the rapid expansion of ethanol production but have become complements overtime due to increasing share of ethanol in fuel consumption.