The effect of biofuel on the international oil market
AbstractThis paper derives a method to quantify the short- to medium-run impact of biofuel on fuel markets, assuming that these markets are dominated by cartel of oil-rich countries, and that prices in these countries are set to maximize the sum of domestic consumer and producer surplus, leading to a wedge between domestic and international fuel prices. We model this behavior by applying the optimal export tax model (henceforth, the cartel-of-nations model) to the fuel markets. Using data from 2007 to calibrate the model, we show that the introduction of biofuels lowered global gasoline and diesel consumption and international fuel prices by about 1% and 2%, respectively. We identify large differences between the effects of introducing biofuels using the cartel-of-nations model, in contrast to the competitive or the standard cartel model (henceforth, the cartel-of- firms model). We illustrate that assessing the effect of biofuels assuming competitive fuel markets overestimates the reduction in fuel price, and underestimates the reduction of gasoline and diesel consumption, and therefore impact of biofuels on greenhouse gas emissions, when compared to the effect under a cartel-of-nations model. Similar conclusions are derived with respect to cartel- of-firms model. Finally, we illustrate that a 20% increase in fuel demand more than doubles the impact of biofuels on fuel markets, compared to 2007.
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Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado with number 61722.
Date of creation: Jul 2010
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Energy; OPEC; biofuel; fuel; carbon savings; optimal export tax model; cheap oil; Resource /Energy Economics and Policy; F1; Q4;
Other versions of this item:
- Hochman, Gal & Rajagopal, Deepak & Zilberman, David D., 2010. "The effect of biofuel on the international oil market," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0k93s7zg, Department of Agricultural & Resource Economics, UC Berkeley.
- Hochman, Gal & Rajagopal, Deepak & Zilberman, David, 2010. "The effect of biofuel on the international oil market," CUDARE Working Paper Series 1099, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- F1 - International Economics - - Trade
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
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