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Entry of Alternative Fuels in a Volatile U.S. Gasoline Market

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Author Info

  • Vedenov, Dmitry V.
  • Duffield, James A.
  • Wetzstein, Michael E.
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    Abstract

    Dramatic increases in levels and volatility of gasoline prices observed in recent years may create market incentives for adoption of alternative fuels characterized by lower price volatility. This hypothesis is investigated by applying the real-options pricing approach to develop optimal thresholds for switching from conventional gasoline to alternative fuels such as ethanol blends. The main result of the paper is that given the historical price patterns of conventional gasoline and ethanol, switching to ethanol blends is an economically sound decision provided this does not decrease efficiency of the vehicle. Analysis of data subsamples during the periods of higher volatility of gasoline prices (Gulf War and War on Terrorism) provides even stronger support for this result.

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    File URL: http://purl.umn.edu/10144
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    Bibliographic Info

    Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

    Volume (Year): 31 (2006)
    Issue (Month): 01 (April)
    Pages:

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    Handle: RePEc:ags:jlaare:10144

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    Web page: http://waeaonline.org/
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    Related research

    Keywords: alternative fuels; decision making under uncertainty; ethanol; price volatility; real options; Resource /Energy Economics and Policy;

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    Cited by:
    1. Serra, Teresa, 2012. "Biofuel-related price volatility literature: a review and new approaches," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126057, International Association of Agricultural Economists.
    2. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
    3. Du, Xiaodong, 2012. "Inside the Black Box: the Price Linkage and Transmission between Energy and Agricultural Markets," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125146, International Association of Agricultural Economists.
    4. Serra, Teresa & Gil, Jose Maria, 2012. "Biodiesel as a motor fuel price stabilization mechanism," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126056, International Association of Agricultural Economists.
    5. Calum G. Turvey, 2010. "Biography: Kiyosi Itô and his influence on the study of agricultural finance and economics," Agricultural Finance Review, Emerald Group Publishing, vol. 70(1), pages 5-20, May.

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