Usually in the week before Labor Day we see gas prices rise relative to their mid-summer levels. Not this year: gas prices are declining, to the lowest nominal levels since November 2005 (WaPo, registration required). Unlike normal summers when the seasonal change in demand elasticity provides the dominant effect on prices, this year saw lots of supply-side policy effects.
The recent price drop was particularly pronounced because this year’s driving season was greeted by rising prices caused by several factors. Prices for ethanol, an additive increasingly used by refineries, shot up this year. Demand grew sharply after the Energy Policy Act passed by Congress last summer prompted refineries to switch from methyl tertiary-butyl ether, or MTBE, to corn-based ethanol as a gasoline additive. As demand rose, ethanol prices climbed to more than $4 per gallon.