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Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach

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  • McPhail, Lihong Lu

Abstract

Despite the growing importance of biofuels, the effect of biofuels on fossil fuel markets is not fully understood. We develop a joint structural Vector Auto Regression (VAR) model of the global crude oil, US gasoline, and US ethanol markets to examine whether the US ethanol market has had any impact on global oil markets. The structural VAR approach provides a unique method for decomposing price and quantity data into demand and supply shocks, allowing us to estimate the distinct dynamic effects of ethanol demand and supply shocks on the real prices of crude oil and US gasoline. Ethanol demand in the US is driven mainly by government support in the form of tax credits and blending mandates. Shocks to ethanol demand therefore reflect changes in policy more than any other factor. In contrast, ethanol supply shocks are driven by changes in feedstock prices. A principle finding is that a policy-driven ethanol demand expansion causes a statistically significant decline in real crude oil prices, while an ethanol supply expansion does not have a statistically significant impact on real oil prices. This suggests that even though US ethanol market is small, the influence of US biofuels policy on the crude oil market is pervasive. We also show that ethanol demand shocks are more important than ethanol supply shocks in explaining the fluctuation of real prices of crude oil and US gasoline.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 6 ()
Pages: 1177-1185

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:6:p:1177-1185

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Web page: http://www.elsevier.com/locate/eneco

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Keywords: Crude oil; gasoline; and ethanol; Demand or supply shocks; Structural Vector Auto Regression (VAR);

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References

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Cited by:
  1. Catherine Hausman & Maximilian Auffhammer & Peter Berck, 2012. "Farm Acreage Shocks and Crop Prices: An SVAR Approach to Understanding the Impacts of Biofuels," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 53(1), pages 117-136, September.
  2. Vacha, Lukas & Janda, Karel & Kristoufek, Ladislav & Zilberman, David, 2013. "Time–frequency dynamics of biofuel–fuel–food system," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 233-241.
  3. Christiane Baumeister & Lutz Kilian, 2013. "Do Oil Price Increases Cause Higher Food Prices?," Working Papers 13-52, Bank of Canada.
  4. Qiu, Cheng & Colson, Gregory & Escalante, Cesar & Wetzstein, Michael, 2012. "Considering macroeconomic indicators in the food before fuel nexus," Energy Economics, Elsevier, Elsevier, vol. 34(6), pages 2021-2028.
  5. Maslyuk, Svetlana & Dharmaratna, Dinusha, 2013. "Renewable Electricity Generation, CO2 Emissions and Economic Growth: Evidence from Middle-Income Countries in Asia /Generación de electricidad renovable, las emisiones de CO2 y crecimiento económico: ," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 31, pages 217-244, Enero.
  6. Papież, Monika, 2014. "A dynamic analysis of causality between prices of corn, crude oil and ethanol," MPRA Paper 56540, University Library of Munich, Germany.
  7. Philip Abbott, 2013. "Biofuels, Binding Constraints and Agricultural Commodity Price Volatility," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.
  8. Serra, Teresa & Zilberman, David, 2013. "Biofuel-related price transmission literature: A review," Energy Economics, Elsevier, Elsevier, vol. 37(C), pages 141-151.
  9. Ladislav Kristoufek & Karel Janda & David Zilberman, 2013. "Non-linear price transmission between biofuels, fuels and food commodities," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2013/16, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2013.
  10. Hao, Na & Colson, Gregory & Karali, Berna & Wetzstein, Michael E., 2013. "Food before Biodiesel Fuel?," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida, Southern Agricultural Economics Association 143078, Southern Agricultural Economics Association.
  11. 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, International Association of Agricultural Economists 125146, International Association of Agricultural Economists.
  12. Gal Hochman & Scott Kaplan & Deepak Rajagopal & David Zilberman, 2012. "Biofuel and Food-Commodity Prices," Agriculture, MDPI, Open Access Journal, vol. 2(3), pages 272-281, September.
  13. Hao, Na & Seong, Byeongchan & Park, Cheolwoo & Colson, Gregory & Karali, Berna & Wetzstein, Michael, 2013. "Drought, Biofuel, and Livestock," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 149957, Agricultural and Applied Economics Association.
  14. Kristoufek, Ladislav & Janda, Karel & Zilberman, David, 2012. "Relationship Between Prices of Food, Fuel and Biofuel," 131st Seminar, September 18-19, 2012, Prague, Czech Republic, European Association of Agricultural Economists 135793, European Association of Agricultural Economists.
  15. Wang, Sun Ling & McPhail, Lihong Lu, 2012. "Impacts of Energy Shocks on US Agricultural Productivity Growth and Food Prices —A Structural VAR Analysis," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124892, Agricultural and Applied Economics Association.
  16. Philip Abbott, 2013. "Biofuels, Binding Constraints and Agricultural Commodity Price Volatility," NBER Working Papers 18873, National Bureau of Economic Research, Inc.
  17. Kristoufek, Ladislav & Janda, Karel & Zilberman, David, 2012. "Correlations between biofuels and related commodities before and during the food crisis: A taxonomy perspective," Energy Economics, Elsevier, Elsevier, vol. 34(5), pages 1380-1391.
  18. Ladislav Kristoufek & Karel Janda & David Zilberman, 2012. "Mutual Responsiveness of Biofuels, Fuels and Food Prices," CAMA Working Papers 2012-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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