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,
FEDERAL RESERVE BANK OF DALLAS
September 1991
•
•
cononnc eVlew
Government Budgets
and Property Values
Lori L. Taylor
Methanol as an
Alternative Fuel:
Economic and
Health Effects
Mine K. Yucel
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Economic Review
Federal Reserve Bank of Dallas
Robert D. McTeer. Jr.
President and Chief ExecutIVe Officer
Tony J. Salvaggio
First Vice Pres/dam And Chief Operating Offlcrr
Harvey Rosenblum
Senior
VJ(~e
Presldelll and Director vi ReseaJch
W. Michael Cox
Vice PresIdent and Associate DirectJr of Research
Gerald P. O'Driscoli. Jr.
Stephen P. A. Brown
AS51.1stanr Virf' Presn.ier::t dnd St'IJIO{ Economist
Economists
Robert T C!arr
John V Duca
Kenneth M Emery
Robert W Gilmer
David M Gould
Wil ,iam C Gruben
Joseph H Haslay
JOfln K H Ii
Evan F Koenig
O'Ann M Olmont
Keith R Phillips
Fiona D Sigall"
Lori L 1aylor
John H Welch
Mark A Wynne
KeVin J Yeats
Mine K YOcel
Research Associates
Professor Na:Lan S Ba!ke
Southern I\Aet:JOdist Univms:ty
Profassm John Bryant
flice Univer51ty
Professor Thomas B FOilby
Soutl,em Methodist Umversily
Profess,!r Swtt FreGl1!all
Un/lcr.Nv of l"exils
Professol John H Wood
Wake forest Umveriit),
Editors
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Contents
Page 1
Government Budgets
and Property Values
Lori L. Taylor
Lori L. Taylor debunks several popular beliefs as she
examines how property values relate to taxes, government
services, and government debt. She finds that, contrary to
popular belief, property values do not necessarily decrease
when local governments increase taxes to pay for services.
Her analysis reveals that taxpayers value all types of government services, including transfer payments such as welfare
and health selvices. Taylor's work also suggests that people
do not automatically prefer deficit spending to tax increases.
Page 9
Methanol as an
Alternative Fuel:
Economic and
Health Effects
Mine K. VOcel
Methanol, because of its low pollution characteristics, is
a possible alternative to gasoline as a motor fuel. In this
article, Mine K. Yucel calculates the economic, pollution, and
health effects of switching from gasoline to methanol fuels.
Yucel finds that use of methanol would lower oil
demand and oil prices, while increased demand for methanol's natural gas feedstock would increase natural gas prices.
Fuel prices would increase because methanol is more costly
than gasoline. However, methanol use would reduce ozone
pollution and some of the health risks associated with gasoline.
i
Lori L. Taylor
Economist
Federal Reserve Bank of Dallas
Government Budgets and Property Values
ec~ssions force local governments to make
difficult decisions. Generally , a weakening
econolllY produces lower tax revenues and higher
demand for government sen'ices To cope \vith
the fiscal demands that a recession induces.
gO\Trnments must raise taxes, cut nonessential
sCIyices. or accumulatc deht None of these
options is particularly appealing.
Ideally, governments \vmild like to choose the
option that rcsidents or potential residents would
most prefer, Economic theory suggests that people
reveal their preferences for a government's mix of
selYices, taxes, and deht by their choice of residence
(Tiehout 19'56) If the mix of services. taxes, and
deht is palticularly dcsirahle in one town, then many
pcople will ,vant to live there. \Vhen the number of
pcoplc who want to live in a town increases and
the numher of houses is limited, housing prices in
that tmvn increase. Thus , housing prices rd1ect
preferences ahout the government 's mix of services,
taxes, and deht. all other things heing equal. Therefore , the local government chooses the most desirahle option if it chooses the option that has the
smallest negative impact on pWlx:rty values.
!\. hedonic /nodel of housing prices reveals the
effect on property values of changes in the composition of local budgets. The ana lysis indicates that
households have a taste for all types of government
scrviccs and that increasing taxes to pay for those
servin.'s need not decrease propelty values The
analysis also indicates that increases in t~lxes and
increases in deht have the same effect on rmpelty
\'alues, suggesting that households view deficit
spending as postponed taxation
R
house should equal the sum of the prices they are
willing to pay for its component characteristics . A
hedonic housing model treats a house as the sum
of its parts and generates estimates of the shadow
(unohserved) prices for each characteristic , \Vhen
loca l government budgets are included as characteristics of the house's location , a hedonic housing
moclc! produces shadow prices for government
services, taxes, and debt. From those shadow
prices, onc can calculate the impact on housing
prices of changes in the composition of 10cal lmdgeLs
Following the literature on hedonic housing
models (Linneman 1980 and Craig, Kohlhase , and
Papell 1989), I model housing prices (~) as a loglinear function of house characteristics (H) such as
'I
air cond itioning and the number of rooms, nonuovernmentallocation characteristics (L) such as
"
'I
distance hom the city center and neighborhood
composition, government characteristics (G'/ ) such
as the size of the debt outstanding and the composition of the budget, and an error term (E):
(1)
In(P) = a+~f3
L.J
I
;-1
I
-H.II +~bl
-L+~
L.J
y
L.J Y , -(;. .+1":I..
1/
;::1
;=1
The local government's hudget constraint
introduces a linear relationship between revenues,
expenditures, and the deficit (if any) . Previous
analyses of housing prices have not dealt with the
linearity problem because they have included
only property taxes and a few other components
of the hudget constraint as explanatolY varia hies .
However, om itting aspects of the hudget introduces specification error and generates regression
The Model
A house is a collection of desirable characteristics, such as shelter, comfort, anc! location Therefore , the price that huyers are wi lling to pay for a
Economic Review-September 1991
I would like to thank Stephen P A Brown, William C, Gruben,
Joseph H Haslag, and Fiona 0 Sigalla for their helpful
comments Of course, all remaining errors are my own
coefficients that are difficult to interpret. Therefore, I follow Helms (1985) by including all
elements of the budget constraint except welfare
expenditures as explanatory variables.
Because the regression coefficients in
equation 1 indicate the effect on housing prices of
a change in one right-hand-side variable, holding
all other variables constant, Helms' approach
produces easily interpretable results The regression
coefficient on the property tax variable indicates
the effect on housing prices of a marginal increase
in property taxes, holding nonwelfare expenditures,
the deficit, and all other revenues constant. Because
the budget must balance, any increase in property
taxes that does not lead to an increase in nonwelfare
expenditures or a decrease in the deficit or some
other form of revenue must increase welfare expenditures. Therefore, the regression coefficient on
the property tax variable indicates the effect on
property values of an increase in property taxes
that finances an increase in welfare expenditures.
Similarly, the regression coefficient on the school
expenditures variable indicates the effect on property
values of an increase in school expenditures that
is financed by a decrease in welfare expenditures
The Data
I estimate a hedonic housing model using
data on communities in the Hartford, Connecticut,
metropolitan statistical area (MSA). I use Connecticut data because Connecticut is one of the few
states in the nation with municipality-based
government. In most states, government jurisdic-
J
2
3
2
Because its sheer size and urban nature make Hartford City
an atypical community in the MSA, I exclude Hartford City
from the analysis
Characteristics of residenls refers to the proportion of the
population that is over 65 years old (OVER65), the proportion of the population that is black (BLACK). the proportion
of the population that graduated from high school
(GRADHIGH), and the average household income of the
population (HINCOME)
With the exception of Hartford City, the municipalities in the
Hartford MSA did not use sales or income taxes to finance
local government activities
tion is divided between cities, counties, school
districts, fire districts, and so on. Further, the
jurisdictions tend to overlap irregularly, so that
school districts straddle county lines and fire
districts include parts of many towns. The data
costs of sorting out government budgets are
prohibitive when, for example, there are multiple
school districts in a city and some school districts
encom pass parts of many cities. In Connecticut,
municipalities carry out all local government
functions, so the data costs are minimized I use
data on J single labor market-the Hartford
MSA-so that I need not control for differences in
property values that arise from labor market
characteristics (Roback 1982).
The 1980 Census of Housing and Population
and the 1977 Census of Governments provide data
on the communities surrounding Hartford, Connecticut.) The Census of Housing and Population
indicates the value of the median owner-occupied
home in each community (MEDVALUE), the
number of rooms in the median home (MEDROOMS),
the proportion of the homes with air conditioning
and sewer connections (AIR and SEWER, respectively), the age of the housing stock (STRUC70,
the proportion of homes constructed after 1970,
and STRUC39, the proportion of homes constructed before 1939), the proportion of housing
units that are unoccupied (VACANTRT), the
proportion of housing units that are owneroccupied (OWNERRT), and the characteristics of
the residents. 2
The Census of Governments indicates
the extent of local government revenues from
property taxes (PROPTAX), from any other
taxes such as real estate conveyance taxes
(OTHERTAX), from any other nontax revenue
sources (OTHERREV), and from running a deficit
(DEFICIT).' The census of governments also
indicates the amount of debt outstanding
(TOTDEBT), the value of any assets held by the
local government (ASSETS), and the extent of
local government expenditures on education
(LOCLSCHL), police protection (POLICE), fire
protection (FIRE), health and hospital services
(HEALTH), highway repair and construction
(HIGHWAY), public buildings (PUBUILD),
welfare (WELFARE), parks and recreation
(PARKREC), all utilities (ALLUTILS), and any
other expenditures (OTHEREXP).
Federal Reserve Bank of Dallas
1
1
For all types of expenditures, I calculate the
level of locally financed expenditures by subtracting
from the level of total expenditures in that category
any user fees or dedicated transfers from other
governments. Because dedicated transfers from the
state or federal government may substitute for local
spending, I include transfers from other levels of
government as explanatory variables. 4 I control for
size differences between communities in the sample
by expressing all revenues and expenditures in
terms of dollars per housing unit. I also use a map
of Connecticut to calculate the commuting distance
between each conununity and the center of Hartford City (DISTANCE).
After obvious outliers were removed, complete
data were available for seventy-four communities
in the Hartford MSA. Table 1 repOlts descriptive
statistics for the variables used in this analysis.
The Results
Not surprisingly, the characteristics of the
housing stock explain a great deal of the variation
in median housing prices (Table 2). Adding a
room to the median home increases property
values by 19 percent. Prices also increase as the
age of the housing stock decreases. A I-percentagepoint increase in the proportion of homes built
after 1970 increases median property values by
0.5 percent. The proportion of homes with air
conditioning or sewer connections, the proportion
of owner-occupied housing, and the vacancy rate
have no discernible effect on property values, all
other things being equal.
The characteristics of the residents also
explain a great deal of the variation in median
home prices. One would expect home prices to
increase as the ability to pay for housing increases,
so it is not surprising that home prices increase as
average household income increases. Home prices
also increase as the percentage of residents over 65
years old in the community increases. The percentage of black residents and the percentage of high
school graduates in the community have no
significant effect on housing prices, given the level
of average household income.
Distance from the city center has the expected negative effect on property values. Given
two otherwise equal communities, the one with
the shorter commute to the employment center
Economic Review -
September 1991
has the higher property values. Each additional
mile from the city center decreases property
values by 0.3 percent.
Expenditures on education by the state and
federal government (IGRED) have a Significant
negative relationship with propelty values, while
all other dedicated transfers have no significant
effect on property values. The negative relationship between education transfers and property
values probably reflects an effort by the state to
direct aid to the poorer communities in the MSA.
The insignificant relationship between other
dedicated transfers and property values may arise
because government efforts to direct aid to
property-poor areas (which would induce a
negative relationship between propelty values
and government transfers) offset the capitalized
benefits of the aid (which would induce a positive
relationship between property values and government transfers).
Only one element of the local budget
constraint has no marginal effect on property
values. Expenditures on health and hospital
services are insignificant in the estimated equation, indicating that property values would remain
unchanged if local governments were to transfer
$1 per household from welfare services to health
services, or vice versa. Households apparently
consider public health expenditures a very good
substitute for welfare expenditures.
Redistributing funds from health or welfare
services to any other type of expenditures would
have a Significant negative effect on property
values. For example, the analysiS indicates that
transferring $1 per household from welfare to
education, fire protection or highways would
decrease property values by 0.46 percent, or $291.
Conversely, transferring $1 per household from
one of those types of expenditures to welfare
would increase property values by 0.46 percent.
4
Specifically, I control for state and federal transfers that are
dedicated to education (IGRED), welfare (lGRWELF), health
(IGRHL TH), and highways (IGRHWA Y) I do not control for
dedicated transfer from other local governments because
I consider them payments for services rendered and unlikely to affect local expenditures
3
Table 1
Means and Standard Deviations
Variable
Mean
Standard Deviation
GRADHIGH
OVER65
BLACK
DISTANCE
HINCOME
STRUC70
STRUC39
SEWER
AIR
MEDROOMS
VACANTRT
OWNERATE
TOTDEBT
ASSETS
75.63
10.69
1.50
21.09
23.91
23 .85
27.72
38.11
41.34
6.21
.07
.75
578.87
32.47
7.625
3.856
1.841
12.227
3.827
9.845
12.761
34.001
13.930
.375
.062
.109
527.244
96.069
PROPTAX
OTHERTAX
ELSEREV
DEFICIT
936.97
9.06
147.06
20.97
191.530
4.977
107.747
181.155
HEALTH
PUBUILD
POLICE
ALLUTILS
FIRE
HIGHWAY
LOCLSCHL
PARKREC
OTHEREXP
WELFARE
11.89
11.43
52.57
39.46
28.79
76.75
707.55
15.57
167.93
2.11
10.589
21 .894
38.366
60.575
25.779
33.228
213.769
12.582
85.376
4.597
IGRHWAY
IGRHLTH
IGRWELF
IGRED
12.52
1.32
3.61
205.93
11 .905
2.632
4.306
91.393
63,339.19
10,485.238
MEDVALUE
Although redistribuling expenditure~
beLween welfare and all other expenditure Lypes
would Significantly change property \':t1u<:~ ,
redistributing fund~ among tbe nOl1\\'\.:lfa re
expenditures would have no perceptible effect
on property values . For example, the estimation
indicates that a $1 increase in police expenditures
per househo ld , financed hy an ellual decre:lse in
welfare expenditures, would decrease properly
4
values hI' 044 percent. or S279. IIo\\,eve r, a $1
decrease in high \\ a y expenditures per hOLlsehold, financing :In ellual increase in \vclfare
expendi tures . \\'ould incre:lse property values by
() 4() percent or S291 Therefore , increasing police
expenditures by S 1 per household while simultaneo llsly decreasing highway expenditures by S1
per household \\'ould increase property \·:t1ues
by an imperceptihle S12 Sutistical tests confirm
Federal Reserve Bank of Dallas
I
i
Table 2
Regression Coefficients
Variable
r
Coefficient
Standard Error
INTERCEPT
GRADHIGH
OVER65
BLACK
DISTANCE
HINCOME
STRUC70
STRUC39
SEWER
AIR
MEDROOMS
VACANTRT
OWNERATE
TOTDEBT
ASSETS
9.5902'
.0013
.0106'
-.0025
-.0029'
.0117*
.0049'
-.0009
-.0010
.0012
.1906'
.1475
-.1960
.00002
-.00004
PROPTAX
OTHERTAX
ELSEREV
DEFICIT
.0045'
0064'
.0046'
.0046'
.002
.003
.002
.002
HEALTH
PUBUILD
POLICE
ALLUTILS
FIRE
HIGHWAY
LOCLSCHL
PARKREC
OTHEREXP
- 0036
- .0043'
-.0044'
-.0045'
-.0046'
-.0046'
- .0046'
-.004S·
- .0049'
.002
.002
.002
.002
.002
.002
.002
.002
.002
IGRHWAY
IGRHLTH
IGRWELF
IGRED
.OOOS
-.0013
-.0032
-.0003'
.001
.004
.002
.0001
R-Square
Adjusted R-Square
.20S
.002
.004
.004
.001
.004
.001
.001
.001
.001
.036
.172
.113
.00002
.0001
.9426
.9002
* Significantly different from zero at the 5-percent level
I
l
f
r
I
I,
lh ~ ll
the change in properly \ '~ illie s \\ oliid he
insignificant In [·act. tesling the joinl I-,ypothesis
lll~lt the c()dlicients on all of till' nOlw:elfare
expenditurL' lypes al'l' insignificlIlllv (Iifferenl
from ol1e another yields ~1l1 F-slalistlc of 1. 16H
(signif'icant at the 51-percenl k~vel), in(licating
th ~ lt no marginal redistrihution of fun d s among
lhe [)em\\ l'lLlre expenditure types \' ould change
proplTly \'~ilues significanrly
Economic Review -
September 1991
Tnc re:lsing lax<.:s or deficit spending \\ oliid
increa se prop<.:l1y values, provided lhat the proceeds \Veil' spent on wclbrl' sl'lyices. For eX~I111ple.
property values would increase by OA'5 IXTcent if
property laxcs and \\'clbre spending each increased
hy S 1 per household . Increasing taxes to pay for
any other lype or spending would have an insignificanr effect on propelty values . Ac.ljll.sting the lax
struct lire so th :\t less rc\ enue ClI11e from property
taxes and more revenue came from some od1er
fonTI of tax or from deficit spending would also
have no significant effect on property values.'
The Implications for Local Governments
Local governments can draw a number of
conclusions about fiscal policy from the relationships indicated by this analysis. One striking
implication of the analysis is that increasing taxes
need not decrease property values. The estimation
indicates that a marginal increase in taxes would
increase property values if the proceeds of the tax
were spent on welfare services. The estimation also
indicates that a small change in taxes, coupled with
a corresponding change in nonwelfare forms of
expenditures, would have no effect on property
values. Therefore, analysis of the Hartford MSA
provides a clear example of a situation in which
increasing taxes does not decrease property values.
Another interesting implication of the
analysis is that Ricardian Equivalence appears to
hold at the local government level. "The Ricardian
Equivalence Theorem is the proposition that the
method of financing any particular path of
government expenditure is irrelevant" because
deficit spending merely postpones taxes (Abel
1987). If the method of finanCing is truly irrelevant, then households should not care whether
local governments finance their expenditures with
taxes or deficit spending. The estimation shows
that property values would remain essentially
unchanged if local governments were to substitute
a small increase in deficit spending for a decrease
in taxes, indicating that households are indifferent
between property taxes and deficits 6
A third implication of the analysis is that
households have a taste for all types of government
6
S
The F-statistic for the joint hypothesis that all of the revenue
and deficit coefficients are equal to each other is 03672
(significant at the 78-percent level) Th erefore, we cannot
reject the hypothesis that the coefficients are equal
6
Because the localities in the Hartford MSA do not use local
sales or incomes taxes as a source of revenue, the analysis
cannot indicate whether or not households are indifferent
between deficits and sales or income taxes
services, including transfer payments such as
welfare and health services. If households were not
willing to spend tax money on a particular government service, then property values could be
increased by decreasing that form of spending and
decreasing taxes accordingly. Given the spending
levels in this data set, the estimation indicates that
there is no form of government spending such that
a small decrease in expenditures and taxes would
increase property values. However, households
could be unwilling to pay for levels of expenditures
that diverge wildly from those in this data set.
Because small changes in both taxes and
nonwelfare forms of expenditures would have no
noticeable effect on property values, the analysis
also suggests that local governments in the Hartford MSA were surprisingly successful at choosing
their budgets so as to maximize property values
within their jurisdictions. In general , local governments in Connecticut spent more than the national
average on education, spent close to the national
average on police services, and spent somewhat
less than the national average on highways.
Because health and welfare services are the only
types of expenditures that the model indicates
should be increased in the Hartford MSA, it is not
surprising that local governments in Connecticut
spent substantially less than the national average
on health and welfare services. Local government
spending per household on health and welfare in
Connecticut was less than one-quarter of the
national average.
Conclusions
By incorporating the complete budgets of
local governments into a hedonic model of
housing prices, this analysis debunks a number of
myths about local government finance. The
analysis indicates that, contrary to popular belief,
increasing taxes need not decrease property
values. Further, the analysis indicates that households do not automatically prefer deficit spending
to tax increases. The analysis also suggests that
households have a taste for all types of government services, including transfer payments like
welfare and health services. Finally, the analysis
indicates that local governments can be surprisingly successful at maximizing property values
within their jurisdictions.
Federal Reserve Bank of Dallas
1
References
Abel, A. (987), "Ricardian Equivalence Theorem" in
77.1e New Palgrave: A Dictionary qf Economics,
edited by]. Eatwell, M. Milgate, and P. Newman, The Macmillan Press Limited: London.
Craig, S , ]. Kohlhase, and D. Papell (989), "Chaos
Theory and Microeconomics: An Application
to Model Specification and Hedonic Estimation," mimeo.
Helms, LJ. (985), "The Effect of State and Local
Taxes on Economic Growth: A Time SeriesCross Section Approach, " The Review ql
Economics and Statistics, 67 (4): 574-82.
Linneman, P. (980), "Some Empirical Results on
the Nature of the Hedonic Price Function for
the Urban Housing Market," Journal of Urban
Economics 8(1): 47-68.
Economic Review - September 1991
Roback , ]. (982), "Wages, Rents and the Quality
of Life," Journal of Political Economy 90
(December): 1257-78.
Tiebout, C. (956), "A Pure Theory of Local
Expenditure," Journal of Political Economy
64: 416-24.
U.S. Bureau of the Census (1979), Census of
Governments, 1977 Finance Summary Statistics [machine-readable data filel, Washington
D.C. : The Bureau [producer and distributor]'
- - - (983), County and City Data Book, 1983
U.S. Government Printing Office: Washington,
D.C.
7
Mine K. VOcel
Senior Economist
Federal Reserve Bank of Dallas
Methanol as an Alternative Fuel:
Economic and Health Effects
A
ir pollution is Ix:coming an increasingly important prohlem for the United Sutes. It is estimated that air pollution contrihutes to the premature
deaths of more than '10,000 people a year and costs
the nation $10 billion to $20 billion annually in
health hills . I Motor vehicles currently contribute an
estimated 10 percent to urban pollution .
The new Clean Air Act, w hich President George
Bush recently signed into law, restricts toxic emissions
without mandating ~I specific fue l. The law m<U1dates
that a ll gasoline solei in the nin e smoggiest cities in
the n:ltiol) must reduce emissions of hydrocarbons
and toxic pollutants hy 1'1 percent heginning in
199'i and hy 20 percent heginning in 2000. By 199H,
all car neets in the nation's twenty-four dirtiest cities
must run HO-percenl cleaner than today's autos.
,"!ethanol is one of severa I ~tlternative motor
fuels that have been studied as replacements for
gasoli ne hecause of its Imv pollution ch:lracteristics.
Ot he r alternative mo to r fuel s are ethanol , compressed natural gas, and reformulated gasoline.
Some analysts at the Environmental Protection
Agency (EPA) believe that methanol deselves
special :Ulention because it seems to have a significant advantage ()\'er the other fuels in tenllS of cost,
potential .~upply, and vehicle performance." The
most popular methanol-based fuels arc MH'), which
is a mixture of H'i percent methanol and 1') percent
gasoline, and MlOO, whicb is pure Illethanol.
There is considerahle dehate aho ut the benefits
;tnd costs of s\vitching from gasoline to methanol.
MH'i seems to be a more feasihle [uel alternative tban
MIOO in the ncar future . IImvever, the pollutionreciuction bendits of MH'5 over gasoline arc not as
clear as those of I\i1100 . Moreover, there is concern
ahout the adverse health effects of hoth methanol fuels .
In this article, I anal yze the economic,
pollution, a nd health effects of switch ing from
Economic Review -
September 1991
gasoline to methanol fuds. The be nefits of the
policy wi ll he a reduction in pollution and a
reduction in the adverse health effects of vehicle
fuels . The costs of the policy will he the distortions in the affected markets. Using a model of oil
demand and supply, I first calculate the effects of
a switch fro m gasoline to metha nol fuds on the
oil , natural gas , and fuel markets . Then I comhine
the estimated pollution a nd health effects with the
model 's predictions to calculate the hea lth and
pollution effects of a switch from gasoline to
methanol fuels . Finally, I calculate the net benefit or
cost of switching from gasoline to methanol fuels .
Economic effects of the switch
to methanol
A switch from gasoline- to methanol-powered
vehicles in the United States affec ts the oil, natural
gas , and \'e hicle fuel marke ts. The motor fuel sector
in the Lnited States is a large o il consumer and
I11:lkes up 1:) percent of total U.S. o il consumption,
which is ahout 12.1 percent of world oil consumption . lIenee, any change in the demand for oil in
the United States affects world o il prices .
Replacing gasoline with methanol raises fuel
prices beca use methanol is mo re costly than
gaso li ne . The switch to methanol a lso increases
I would like to thank Kelly Whealan for excellen t research
assistance and Stephen P A Brown, John K. Hill. and Mark
French for helpful comments
, See Gutfeld (1990)
, See Lorang (1990)
9
Figure 1
Oil Prices
(Increasing Natural Gas Prices)
Dollars per barrel
the demand for natural gas because natural gas is
assumed to be the feedstock for methanol.
To calculate the ctlects of the switch to
methanol, I utilize the results of my Dynamic Oil
Mode l (see the box titled "Theoretical Model"),
which calculates the world price of oil , the price
of domestic motor fuels, and the demand for fuel
before and after the switch to methanol. for
simplicity, I assume that gasoline producers and
methanol producers are the sam e , As we switch to
methanol fuels, the rdiners (tha t is, the producers
of fu eD switch from oil as a feedstock to natural
gas as a feeds tock. The policy of changing to
alternative motor fuels is applied evenly across
the nation; the regional allocation of o il consumption is not considered.
Base case. The base case represents the oil
market before the switch to methanol , in which
motor fuel is 100 percent gasoline. The initial
price of o il is $13.28 per barre l in 1987 a nd rises
to about $40 per barrel over the fO l1y-year time
h orizon . U.S. oil production satisfies 51 p e rcent of
tota l cons umption at the beginni ng of the time
period and d ecreases to 40 pe rcent at the end of
the time period. The average price o f gasoline is
95 cents per gallon at the pump initia lly and rises
to $1.56 per gallon as oil prices in crease.
Phasing-in ofM85 and MIOO. As the alternate
fu e ls M85 and M100 are phased in , the demand
['or o il is reduced a nd oil prices L1I1. As a higher
percentage ot cars hegin using the alternative fuels
to\\ ard the end of tht: phasing-in period, oil prices
fall further and rill' price differe ntial hetv.:een the
hase-case o il-price path (gasoline) and the MH5
ami 1\11 00 oil-price paths becomes larger (Figure 1) .
Because domestic producers are pri ce takers
and have perfect foresight in this l11odel, domestic
production increases dramatica lly when alternate
fu e ls beg in to be phased in . Knowing that the
demand for oil ""ill be curtailed , producers try to
take ;[(l\'antagl' of oil prices before they start
falling As gasoline is phased out , however,
domestic o il production starts to fall. Oil imports
also fall \\'ith the s\yitch to nongaso lin e fuels
The phasing-out of gasoline increases the
amount of oi l consumed in nontransportation uses
heG1USe of the de'crease in the price o f oil. With the
switch to mel hanoI-based motor fue ls, H5 percent
of the oil lIsed in vehicle fuels is re placed with
me thanol in the MH5 case, and 100 percent is
re placed in tht: MlOO case. This replacement
amounts to a 42.3-percent reduction in oil demand
\\ ith l'vIW; and a 'iO-percent reduction w ith M100.
Howe\·er. total oil consumed over the entire time
horizon [alb only 24 percent with M85 and 28
percent with M100. This reductio n occurs because
the \,"orld price of oil falls as U.S . demand for oil
decredses. Oil and its cheaper products are substituted for the no\\' relatively more expensive natural
gas or other products in nontransponation uses.
The switch to methano l fu e ls a lso affects the
natural gas market. The demand for natural gas
increases \vith the switch to metha no l because it
is assumed to be the feedstock for methanol. As
natural gas becomes more expensive, however,
consumers will substitute' ,l\vay fro m natural gas .
I make t\\.'o differing assumptions about the
cost of the n,nural gas feedstock. First, r assume that
natural gas prices are the same as in the base case.
This ,lssllmption implies that the demand fo r natural
gas stays at base-casl' levels. Constant r rices would
be possible through the substitution of oil rroducts
for natural gas in nontransportation uses. For
example, residual fuel oil would replace natural gas
in industrial uses. and heating oil would replace
natural gas in residential uses However, the assumption of constant natural gas prices is q uite restrictive
hecause it mea ns that 72 percent of natural gas
Federal Reserve Bank of Dallas
Theoretical Model
I use a dynamic optimal control model
set in a partial equilibrium framework to simulate time paths for oil prices, oil production,
and consumption. OPEC is modeled as a
dominant firm facing U.S. total demand foroil,
less U.S. domestic production and non-OPEC
imports to the United States. Domestic producers are profit-maximizing price takers in
the crude oil market. Both the United States
and OPEC own reserves and maximize the
present value of profits over a forty-year time
horizon. I simulate the paths of the variables
for a base case in which gasoline is based 100
percent on oil. The demand function for crude
oil is an iso-elastic function with a price elasticity of -0 .9 and an income elasticity of 0.8 .
The demand function is derived from domestic demand for products and normalized around
1987 demand. The cost functions for OPEC
and the United States are also normalized
around 1987 costs for these regions. I assumethat U.S. income will grow at2.5percent
per year. The discount rate is 8 percent.
After the base case , the model is solved
with the demand for oil based on two different
mixtures of gasoline and methanol most often
discussed : an 85-percent methanol and 15percent gasoline blend (M85) and 100 percent methanol (M100) . M85 and M100 are
phased in slowly over the average life of a
vehicle. It is assumed that the use of methanol
will be mandated by the government, and
hence all vehicles will be dedicated vehicles
and will be using methanol by the end of the
phasing-in period. 1
When methanol is blended with gasoline , methanol replaces a portion of gasoline,
shifting the oil-demand curve inward. To obtain the new quantity of gasoline demanded,
I calculate a new gasoline price and a new
product-weighted average elastiCity of oil. The
process is repeated with M100. The price
elasticity of fuel is assumed to be constant
among the different fuels.
After the simulations are completed and
price and output paths for oil are obtained, I
calculate the price of gasoline, methanol
(M100), and the methanol-gasoline blend
(M85) . I obtain the price of gasoline by dividing the per-barrel price of oil by forty-two
(forty-two gallons in a barrel) and by adding
various costs and taxes. When calculating the
price of methanol, the feedstock is taken to be
natural gas. Natural gas prices depend on oil
prices in the base case. As gasoline is phased
out, natural gas prices are kept constant in
case 1 and allowed to rise with increasing
demand in case 2. The methanol price is then
converted to agasoline-equivalent pump price
by an adjustment factor, because methanol
has one-half the energy content of gasoline
but is more fuel-efficient. The M85 blend is
calculated as a weighted average of methanol and gasoline prices.
I
The re sults reported in this study overstate the effects of any
switch to alternative fuels because it is assumed that all
vehicles will be using either the MB5 blend or Ml 00 at the end
of the phasing-in period , In reality, the numbers will most likely
be much smaller. However, complete vehicle dedication is a
necessary assumption to highlight the qualitative effects of the
switch to methanol
consumption must be rt"pian: ci hy oil or other 'uhslitlltV.~ ill till" .~\\ Itch to :\ IH"i . \Vith !'I [ 100. H"i percent
of n:Hul":d g:l.~ consumptioll Illll.~t hc rcpLtccd .
natural gas :lJlcl a long-rull price l'i:tsticity of
demanci for natural gas of _0.; ami assuming that
If tIK' iI1LTl'a.~l' in dcmand fur natural gas in
l r:llbpOrl:l tion use.., is nOl off~l't h~ ' al1 ctju:d dl'Cl"l'asc
in neJlltranspol1ation uscs. the pricl' of n:llurai ga.~
ol1l'-lulf
natul ~ d gas consumption i,s replaced hy
clll':lpl'r oil products, natural g:IS pricl'.s \\"Oldd
increase "i2 percl'nt \\ ith :Vlii"i and :Ihout 61 pl'rcent
Economic Review -
September 1991
\\ ill rise Ci\'cn the secular inCl"e:lsl' in demand for
or
11
Figure 2
Fuel Prices
(Increasing Natural Gas Prices)
The results are stronger with M 100. MIOO is
less efficient than M85 because MlOO is pure
methano l, and hence it is more expensive on a
gasoline-equiva lent basis. The price of fuel in this
case is higher than both gasoline and M85 . Consequently. the total amount of fuel consumed with
MlOO over the forty-year period is 26.3-percent
less with constant natural gas prices and 35.4percent less \\'ith increasing natural gas prices.
Dollars per gallon
2.5
2 25
2
Welfare e ffects
1.75
1.5
1.25
75 +---------,----------.---------r--------~
1987
1997
2007
2017
2027
with MIOO if supply was completely inelastic. 1
He nce, in the second case, I assume that natural
gas prices increase 50 percent from the base case.
This level is an upper bound , given that natural gas
supply is not perfectly inelastic.
In the motor fuel market, the relative prices of
gasoline, methanol, and the M85 blend change as
alternative fuels are phased in , as shown in Figure 2.
Pure metha nol is more exp ensive than pure gasoline , hence, the price per gallon of M85 (gasoline
equi valent at the pump) is higher than a gallon of
gasoline throughout the time horizon. E\'Cn though
gasol ine prices fall with the switch to methanol, the
reduction in gasoline prices is not enough to offset
the price ditTerential between gasoline and methanol. At the end of the forty yea rs , methanol fuel
consumption is 8.5-percent less than gasoline ,;",ith
constant natural gas prices and 17.S-percent less
with increasing natural gas prices
" See Bohi (198 1).
, The measure of producers' welfare IS th e present value 01
total profits over the forty·year tim e horizon The loss es or
gains to consumers are calc ulated by the changes in
con sumer surplus using Hausman 's ( 198 1) measure of
compensated variation
By lc)\\ ering the price of oil and increasing
the price of vehicle fuels. the switch from gasoline
to methanol fuels has implications for consumer
ancl producer ,;yelfare in many mark ets . The fall in
the price of o il is beneficial to consumers of oil
but hurts producers of oil. If natural gas prices
increase , producers henefit . but consumers of
natural gas are hurt. In the vehicle fuel market,
both consume rs and producers of fuel are hurt. '
Domestic oil producers are worse off vliith the
change to met hanol fuels hecause both the price of
their product and their sales decrease after gasoline
is phasecl o ut Profits are reduced 46 ,3 percent from
the base case with 1\18"; and ')1.7 percent with MlOO .
On the other hand. oil consume rs who are in the
market for products other than motor fuel a re better
off. The gain in consumers' surplus is forty times
greater than hase-case domestic producer profits
w ith MHS and fift y-six times greater with Mlon. Gains
in consumer surplus are large heca use the world
price of oil falls "" ith the s""itch to methanol. Therefore. not only domestic oil hut also imports are
cheaper. Because domestic production increases
until g,Nlline is fully phased out. consumers enjoy an
ahundant supply of cheap oil for the first eight years .
Even though supply is decreased after phaSing-in is
completed, oil prices are al""ays less than in the
base case. O\'erall , there are gains in the oil market.
The situation is reversed in the fuel market;
there arc losses to both consumers and producers
of fu el. Producers are hurt b ecause the cost of
proclucing methanol is higher than the cost of
producing gasoli ne . Moreove r, because of the
higher price of fueL fuel consumption is less with
me thano l fueb than with gasoline . Highe r input
costs along ""ith 10""er sales pinch producer
profi ts . With constant natural gas prices, profits
fall 1') percent ""ith the switch to MH') and 19.3
Federal Reserve Bank of Dallas
percent with the switch to MIOO. The fall in
profits is more dramatic in the case of increasing
natural gas prices. The losses rise to 30 percent of
base-case profits with M85 and 35 percent with
MIOO if natural gas prices are increasing.
Higher fuel prices hurt consumers; there are
losses in consumers' surplus with the switch to
methanol fuels . As with producers of fuel, the
highest losses on the consumers' side are when
natural gas prices are increasing. To put consumer
losses in perspective, we can express them as a
percentage of refiner profits before the switch to
methanol. The losses range from a low of 2.2
percent in the constant natural gas price case with
M85 to a high of 23.4 percent with increasing
natural gas prices and MIOO.
The natural gas market is also affected by
the switch to methanol. If natural gas prices are
constant, there is no welfare loss or gain in the
natural gas market. In the case of increasing
natural gas prices, producers are better off, but
consumers are worse off. A rough approximation
of consumer losses shows that losses in the
natural gas market are twice consumer losses in
the fuel market. Producer gains in the natural gas
market do not make up for the consumer losses.
Producer gains are about one-tenth of consumer
losses in the natural gas market.
If we analyze the three markets separately, we
see that there are gains in the oil market but losses
in the fuel and natural gas markets. However, the
gains in the oil market are large enough that if the
losses and gains ii\.l;he three markets are combined,
the switch from gasoline to methanol fuels appears
to have net gains for the economy (Table 1).
The gains in the oil market arise from the
United States' monopsony power in the world oil
market. The fall in demand for oil in the United
States causes a decrease in the world price of oil.
However, there are more efficient policies, such as a
tariff, that could capitalize on this monopsony power.s
Methanol use will reduce ozone pollution and
some of the health risks associated with gasoline.
The health effects of vehicle fuels can be separated into two types: indirect exposure to the fuel
through evaporative and exhaust emissions
(pollution) and direct exposure through ingestion,
inhalation, skin and eye contact, and fuel fires.
Effects of indirect exposure
pollution. One of the most important contributors to urban pollution is ozone. Ozone is a very
reactive gas found naturally in the earth's atmosphere that becomes dangerous at high levels.
The Clean Air Act classifies ozone as a criteria air
pollutant, which has "an adverse effect on public
health and welfare ... and results from numerous or
diverse mobile and stationary sources.,,6
Ozone is not directly emitted by the pollutioncausing sources but is produced by the reaction of
nitrogen oxides (NOxs) and reactive organic compounds (ROCs) in sunlight. Ozone-causing NOxs
and ROCs escape from fuels mainly because of
combustion through the exhaust or tailpipes of
automobiles. ROCs are also emitted from automobiles through evaporation and spillage.
Exhaust emissions are the largest portion of
total emissions. The ROCs released through the
combustion of gasoline are certain hydrocarbons
containing no methane or oxygen Cnonmethane,
nonoxygenated hydrocarbons-NMHCs), formaldehyde Ca hydrocarbon containing oxygen),
carbon dioxide CCO), and carbon monoxide
(CO). Methanol emits all these reactive organic
compounds emitted by gasoline plus methanol,
but in different concentrations.
There are various estimates of the gases
emitted in the combustion of gasoline and methanoP To be able to compare gasoline and methanol
emissions as contributors to urban air pollution, it
is important to obtain a measure that calculates
Hence, if we do not include the gains in the
oil market but concentrate only on the fuel and
natural gas markets, the switch from gasoline to
methanol fuels would result in welfare losses.
5
See Brown (1982)
6
See Tilton (1989)
7
See Environmental Protection Agency (1989), Austin (1990),
Adverse health effects of vehicle fuels
The switch from gasoline to methanol is
expected to have considerable health benefits.
Economic Review -
September 1991
and Gold and Moulis (1987)
13
Table 1
Welfare Losses or Gains from Switching to Methanol
(Increasing Natural Gas Price Case, Billions of Dollars)
Consumers
Producers
8,595,6
-883,3
-2,177,2
-99.4
-320,7
196,3
12,127,1
-1,248.4
-2,263,0
-111,1
-376,8
201,3
M85
Oil Market
Fuel Market
Natural Gas Market
M100
Oil Market
Fuel Market
Natural Gas Market
NOTE: The losses/gains are the discounted value of total losses and/or gains over the forty-year
time horizon , A negative number denotes losses_
the ozone-forming potential or these gases and t()
standardize em issions test resu lts , The emissions
estim ates used in this article are taken from ~l
study hy Krupnick, Walls, and Toman (1')<)0),
refcrred to as the NFl' stllG~}' from no\\' on' The
RFF study comp utes a reactivity measurc that
in cludes nonmethane h ydroca rhon em issions,
mcthanol emissions , and form~dde hyde e miss io ns,
from gasoline , NIH'S , and M100, The exten t ( 0
vvhich health problems related to ()ZOIW pollution
are reduced w ith mclh~lI1ol depencls on the
alllount of ozone reduction caused by (he s\\ itch
from gasoline to methanol
The study calc ulates emissions using lesl results from the
American Petroleum Institule database for flexible fueled
vehicles (FFVs) and dedicaled vehicles using M85 There
were too few MI OO results in Ihe database therefore the
emissions for M100 are adjusted numbers from the litera ture From their fIVe scenarios I take only th e "most likely
scenarios, which are the followlI1 g year 2000 FFVs year
2000, dedicated M85s, year 2010, dedica ted MIOOs
, I foc us on the years 2000 and 20 1010 faCilitate the use of the
RFF study. which calculates a reactivity measure for gasoline and methanol fuels for these years
14
TIll' net amount of pollution reduction \vith
th e S\\ itch to Illl'thanol un he c dculared hy
comhining till' rl'acti\ity estimates in Table 2 with
fuel consumption nUI1lI)(.'rs from the simulations .
The ll'acti\'il\' cSlimates in Tahl e 2 shO\\' th ~ lt in
2000. \[H'i \\'ill rcduce (Ill' rl'actants in the air
(giq:n hy gr~ II1lS per mil<:) hy II pe rcent \\'ith
comp letc '" dl'dicatcd \ c hicles and h\- 2'i percent
\\'itll fl exible fueled \'chicles. B y 2010. ,\ 1100 '\vill
red UCl' rl': IL't:ll1LS hy 12 percell r
Till' ci<:ci iIll' ill ozone-form in g potential with
lllcthallol is great'" enhanccd hy the JCC01l1panying cil'ciinl' in fuel consumption. Thc simulation
results indi cate thaI fud demand \\ ith l'vIH'S and
,\ 1100 a rl' less th~lI1 \\'ith gasoline throughout the
tillK' horizoll hl'CJll.~e fuel prices are higher than
\\ ith gasoline in hoth the constant :md incrc.::Jsing
n ~ ltur; i1 gas pri ce cases. If natural gas prices are
constanl. rl'an iyity in 2000 w ill he reduced 20
percellt \\ ith dedicated :\IH5 \'e hi cles and 30
pl'l'Cl'nt \\'ith tll'xihi<: fueled \ ehicle,<) In 2010, use
of :\ 1100 reduces rl'acti\'ity hy 'i3 percent with
constant nJtural gas priccs . If natural gas prices
increase \\'ith thl' s\\'itch to methanol. redu ctions
in rl':tcti\-it\' :lrl' l'\'en greater, ranging from 3'i
percent in 2000 \\'ith :\[H'i to 63 percent in 2010
\\'ith :\Il OO . It is lTidl'nt from these ca lculatio n s
Federal Reserve Bank of Dallas
I
Table 2
Gasoline versus Methanol Vehicle Emissions
(Grams per Mile)
2000
Gasoline
FFV
.542
.53
.004
.52
3.94
.50
.0
.042
.67
2.74
Evaporative
REACT
.41
.216
Total
REACT
.952
.716
Exhaust
REACT
NMHC
HCHO
NO,
CO
2010
M8S
.59
.0
.06
.72
4.79
Gasoline
M100
.270
.263
.003
.20
3.50
.178
.05
.015
.50
.0
.257
.023
.003
.847
.408
.237
NOTE: REACT = Reactivity measure
NMHC = Nonmethane hydrocarbons
HCHO = Formaldehyde
NO, = Nitrogen oxides
CO = Carbon monoxides
FFV = Flexible fueled vehicles
M8S = Dedicated M8S vehicles
Ml00 = Dedicated Ml00 vehicles
SOURCE: Krupnick, Walls, and Toman (1990)
tllat till' ozone-forming pOlellli:tI of \'l,hick, fuels is
gre:III!' reduced \\ ilh the pl1asing-(lut of gasoline .
To lransbte the emissioll ,~ reductions into
spccific nllmlwrs rl'l:iting to hl'alth hl'ndits, I ll.Se
Ihc cst illutes of {// '()fdecl cloys oj' tic/I '(,I:W' cUllseCjllellces from !l.S. Congrcss, Olfice or Technology
i\.~sl'ssment ( ll)Hl) l. Till' puhlicllioll n:po rts that.
on :1\ l'I':lgl', a l-percent rl'du ction in I{OC:s
red LK es restricted ani \ if)' d:1 ys due to pollution hy
2.... 0 . ()()() d:l\'.s and reducl's rl's pirafory symptoll1
cla\'s h\ =i I 1.000 days :1I1c1 asthm,1 attack d:IYs hy
1"7.100 d:l)s (t'or the total pO(1uLitionJ Assuming
lkll a I-pt'l'cent decrease in re:lcti\'ity ',,\'oulel result
in till' .same reduction in ad\ l'l'SL' health days, the
redllLtioll in adn:'1'se health days r:lI1ges from l'i .7
million cI:l\'S in 200() \\ ith :'vl~'i :lnd constant
n:lIur:tI ga.~ prices to 4H 5 million day.s in 2010
with 1\11 00 :lI1d increasing n:llur:ll gas pricl's .
Economic Review -
September 1991
The ga in to society from t hl' reduction in
health days is quite large . If we assuml' that one
Ix"rson in four misses a day of' \\'ork fro1l1 an
ad\'crs(:' lll,:t!tb day, the pr(:'selll v:t1ue of wagcs
gaincd hy the switch to methanol, ()\,er the fortyyear timc h()rizon, ranges from S5 =i billion ,vith
1\-IS') and constant natural gas pJiccs to $1O.=i hillion
\vitll !\J 100 and increasing n~llur:d gas priccs .'"
The reduction in emissions , however, is not
fhe on ly factor fhat affects a ir quality. Emissions
II one p[J(son in 100 misses a day elwork Irom an adverse
Ilea/lh day Ihe pres ent value 01 wages gained would
range from $140 mil/Ion with M85 and constant natural
gas pnces 10 $550 nlil/ion with M100 and IIlcreasl!lg
natura l gas prices
15
test results are entered into large photochemical
air-quality modeling studies to analyze the effects
of emissions on air quality. 11 The studies suggest
that the conversion of gasoline-fueled vehicles to
methanol-fueled vehicles will reduce ozone levels
in urban areas . All the studies emphasize that the
hydrocarbon-NO, ratios (HC/NO) in the atmosphere in a certain locality are very important in
determining whether a switch from gasoline to
methanol will improve air quality. The switch is
most beneficial when HC/ NO, is low. Hence, in
certain urban areas , such as Houston , where this
ratio is consistently high, the benefits of switching
to methanol-fueled vehicles will be much less
than in areas with low HC/NO,.
Air toxins. In addition to ozone pollution,
gasoline also emits several air toxins , including
fuel vapor, benzene, l,3-butadiene, polycyclic
organic materials (POMs), and formaldehyde ,
which are classified by the EPA (989) as known
or probable carcinogens. The switch to methanol
should reduce most of these air toxins
Methanol does not contain benzene and
POMs, and it has minute amounts of 1,3-butadiene.
Hence, there would be no adverse health effects
due to these compounds with MlOO. The EPA
(1989) estimates that M85 would reduce the level of
benzene by 70 percent, POMs by 72 percent, and
1,3-butadiene by 64 percent. The EPA suggests that
chronic effects related to methanol vapor are not
likely with M100, but the combined effects of gasoline and methanol would be expected with MR5.
The cancer incidence estimates from
gasoline 's air toxins range from 379 cases to 727
cases (see Adler and Carey 1989, and EPA 1989).
Table 3 shows that there would be a reduction of
a minimum of 254 cancer incidences with M85 in
2000. The reduction in cancer incidence from air
toxins could be as high as 633 cases in 2010.
The increase in formaldehyde emissions
with methanol is more problematic. Aside from
" See. for example. Russell (1990, Table 1), Chang and Rudy
(1990). and Sillman and Samson (1990)
12
The EPA (1989) assumes that there will be improvements in
methanol-engine and emission-control technology and thus
reductions in indirect formaldehyde emissions with M100
16
increasing the ozone-forming potential of fuels ,
formaldehyde causes metabolism problems in
certain population groups and is also a probable
carcinogen. Studies with rodents have shown that
inhalation of formaldehyde leads to nasal tumors
and its ingestion (mixed in drinking water) leads
to increased leukemia and gastrointestinal cancers
(Beyaelt, and others 1989). Adler and Carey
(989) estimate that formaldehyde from gasoline
led to forty-three to eighty-one incidences of
cancer in 1986. Switching to M85 wou ld increase
cancer incidence, while switching to MIOO would
decrease cancer incidence. II Table 3 shows that
the increase in cancer incidence with M85 can be
as high as seventy-seven cases in 2000 and ninetyfive cases in 2010. With MlOO, cancer incidence
could fall by sixty-three cases in 2010 .
Overall, the switch from gasoline to methanollowers health risks from indirect exposure.
The pollution potential of methanol , as measured
by total reactivity, is less than gaso line Although
methanol emits higher levels of formaldehyde ,
emissions of both re3ctive organic compounds
and air toxins are less with methanol than with
gasoline
Effects of direct exposure
The relative safety of direct methanol exposure as compared to gasoline is much debated. The
switch to methanol seems likely to decrease the risk
of vehicle fires and the incidence of ingestion, inhalation , and skin or eye contlCt. However, methanol
use could increase the number of lethal cases of
inhalation, ingestion, and skin or eye contact .
If methanol fuels are not used in nonautomotive uses, health risks due to inhalation of fuel
will be reduced . Machiele (1990) estimates that 50
percent of inhalation cases arise from nonautomotive uses of gasoline. Combined with the chemical
propel1ies of M85 and M100 , the incidence of
inhalation cases would be 80 percent of gasoline
with M85 and 20 percent of gasoline with MIOO.
Although the number of cases of inhalation
would decrease with methano l fuels, the number
of serious injuries or deaths could increase .
Litovitz (988) reports that the mortality rate with
methanol fuels is 0.375 percent as compared to
00157 percent with gasoline. As shown in Table
3, the number of deaths with methanol fuels
Federal Reserve Bank of Dallas
r
I
Table 3
Health Effects of Gasoline versus Methanol
(Increasing Natural Gas Prices)
2010
2000
M100
M100
Gasoline
M8S
248-413
0
627-1149
310-516
0
55-102
95-179
0
68-128
118-223
34-65
2,660
0
1,775
7
386
3,322
0
2,214
8
478
2
Skin/Eye Contact
Incidence
Deaths
10,135
2
4,226
16
3,686
14
12,656
2
5,273
20
4,564
17
Ingestion
Incidence
Deaths
19,642
3
3,670
5
1,246
5
24,532
4
4,881
6
1,542
6
Vehicle Fires
Injuries
Deaths
6,318
1,071
2,057
349
198
34
7,836
1,328
2,579
438
248
43
Gasoline
M8S
Air Toxins
Cancer Incidence'
502-921
Formaldehyde
Cancer Incidence'
Inhalation
Incidence
Deaths
'These numbers indicate a range of possible cancer incidence.
cou ld increasc hy O lll' to e ight caSl'S
:\S clk'ulatl'd frolll :\bchiele (1990l ami
Lit()\ 'itz (191111).11 11 pern::'nt of g~lso li ne ingcstion
ClSC,~ in 1911' \\ ere due to autoJ1loti\ e uses of
g:lsolinc. Assullling the saille percentage of ingestion \\ oulel result from methanol 's autollloti\ l'
L1ses :md combining \\'ith silllulation result.s , I
ol1u i11 a ni nlTea ,s e of t\\'o to th ree J1lorUI ity case.s
dLll' to Illctil:ll1ol LIse .
Fift y percent of skin or e ye contact cases
\\ ith gaso line res ult frolll autollloti \'c L1ses. Fsti!luting the incidence per ga l/on of gaso lin e used
and :l.ssLlming 'i0 percent \\'oLlld ~lppl} to meth:lno!. the incilkncc of skin or e ye contact "ith
llll'thanol can he calculatl~d . Tahle :) prescnts
t lll'sC results . The fourlcen to t\\Tnty deaths
reportcd arc the maximum tklt would result,
using Lito\'itz's mortality rate cs t imatl'.
'-lac-hicie (199()) reports an a\'l'l'age of 11'i11
Economic Review -
September 1991
de ~llhs
and 'i ,060 injuries I'l'lated to ve hide fires
involving gasoline in 19H6, Comhining l\bcbicle's
estim~ltes for death ancl injuries for !\IR'i and tvil OO
with fLlci consumption frolll the simulations, I
ohtain a ()O-pe rcent reduction in deaths and
injurics \\ ith :\IWi and a t)(J-percent reduction with
:\[ I 00 if natural gas prices arc con.stant . With
increasing natural gas prices, the reduction in
deaths :ll1(1 injuries is (ll percent with MWi and
t)/ perccnt w ith I"'JI 00 (Tah/e .'n.
O\era ll. it is evident that the incidence of
direct contan \\'ith automotive fllels is greatl y
lessened \\ ith methanol mainl y iJecl llse of its lack
of T1on:lll tOlllotive llses . Howl'\,er. heca use
methanol h:lS a higher mortality rate and contains
a larger percentage of fo rmald ehyde than gasoline
does, the numher of serious injuries and deaths
from direct methanol contact cOlild he higher than
that from gasoline .
l7
Conclusion
Switching from gasoline to methanol fuels has
impoltant economic and health effects . Replacing
gasoline with methanol will affect oil markets by
lowering the demand for oil and thus lowering oil
prices. Increased demand for the natural gas
feedstock will increase natural gas prices. Because
methanol is more costly than gasoline, fuel prices
will also increase. On the other hand, methanol use
will reduce ozone pollution and some of the health
risks associated with gasoline.
Are the costs worth the benefits of switching
from gasoline to methanol' Although there are
welfare losses in the fuel and natural gas markets,
the gains in the oil market more than offset these
18
losses. Considering all three markets affected by
the phaSing-out of gasoline, the switch to methanol results in net gains. The health benefits from
lower pollution and the lives saved from the
switch from gasoline to methanol are in addition
to these gains. Overall, the benefits of the policy
far outweigh the costs.
However, the gains in the oil market, arising
from the United States' monopsony power in the
world oil market, can be captured by other, more
efficient policies. If we exclude the gains in the oil
market from the welfare calculations and consider
only the vehicle fuel and natural gas markets, the
policy will result in welfare losses. The present
value of these losses would total $3,687 billion
over the forty-year time horizon.
Federal Reserve Bank of Dallas
References
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1
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20
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