An ethanol blend wall shift is prone to increase petroleum gasoline demand

In 2010, the U.S. Environmental Protection Agency announced a waiver allowing an increase in the fuel–ethanol blend limit (the “blend wall”) from 10% (E10) to 15% (E15). Justifications for the waiver are reduced vehicle-fuel prices and less consumption of petroleum gasoline, leading to greater energy security. Empirical investigations of this waiver using Monte Carlo simulations reveal an anomaly where a relaxation of this blend wall elicits a demand response. Under a wide range of elasticities, this demand response can actually increase the consumption of petroleum gasoline and thus lead to greater energy insecurity. The economics supporting this result and associated policy implications are developed and discussed.