Ethanol use soared in 2006 and as more of the biofuel comes onto the market this year, gasoline prices for consumers could drop, a U.S. oil industry lobbying group said on Friday.

The American Petroleum Institute said about 5 billion gallons of ethanol was produced in 2006, 35 percent more than the year before, and that more than 40 percent of all U.S. gasoline now includes the fuel additive.

"Part of the reason you saw the sharp decline in gasoline prices post-August into the beginning of November was the decline in ethanol prices," said the association's chief economist, John Felmy.

Ethanol's price declined by $2.50 a gallon during that period he said. Since the additive makes up one tenth of a gallon of retail gasoline it created a 25-cent price drop at the pump.

Ethanol output will be even bigger this year, with eight refineries expanding their capacity, according to industry estimates. That could mean more savings for consumers at the gasoline pump.

"There are a lot of ethanol plants under construction, and if that continues you could see significantly more supplies," Felmy told reporters.

"If you have excess supply ... if it's not absorbed based on the relative prices, you could see a (price) softening of the (ethanol) market," he also said.

Many consider ethanol, made from corn grown in U.S. fields and also from sugar in ethanol powerhouse Brazil, key to reducing the country's dependency on foreign oil. President George W. Bush is expected to call for more ethanol use during his State of the Union speech to Congress next week, according to sources.

Currently, there are 111 ethanol refineries operating nationwide that can produce more than 5.4 billion gallons annually. A sweeping energy law passed in 2005 called for 4 billion gallons to be produced in 2006, with ethanol production reaching 7.5 billion gallons by 2012.