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The effect of biofuel on the international oil market

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  • Hochman, Gal
  • Rajagopal, Deepak
  • Zilberman, David

Abstract

This 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 Info

Paper provided by Agricultural and Applied Economics Association in its series 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado with number 61722.

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Date of creation: Jul 2010
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Handle: RePEc:ags:aaea10:61722

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Keywords: Energy; OPEC; biofuel; fuel; carbon savings; optimal export tax model; cheap oil; Resource /Energy Economics and Policy; F1; Q4;

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References

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  1. Dees, Stephane & Karadeloglou, Pavlos & Kaufmann, Robert K. & Sanchez, Marcelo, 2007. "Modelling the world oil market: Assessment of a quarterly econometric model," Energy Policy, Elsevier, vol. 35(1), pages 178-191, January.
  2. Moran, Theodore H., 1981. "Modeling OPEC behavior: economic and political alternatives," International Organization, Cambridge University Press, vol. 35(02), pages 241-272, March.
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Cited by:
  1. 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.
  2. Philip Abbott, 2013. "Biofuels, Binding Constraints and Agricultural Commodity Price Volatility," NBER Working Papers 18873, National Bureau of Economic Research, Inc.
  3. Mads Greaker & Michael Hoel & Knut Einar Rosendahl, 2014. "Does a Renewable Fuel Standard for Biofuels Reduce Climate Costs?," Working Papers 2014.32, Fondazione Eni Enrico Mattei.
  4. Drabik, Dušan & de Gorter, Harry, 2013. "Emissions from Indirect Land Use Change: Do they Matter with Fuel Market Leakages?," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra Provider-Homepage: http://www.roaae.org;Association of Agricultural Economists in Slovakia (APES), vol. 16(2).
  5. McPhail, Lihong Lu, 2011. "Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach," Energy Economics, Elsevier, vol. 33(6), pages 1177-1185.
  6. Klotz, Richard & Bento, Antonio M. & Landry, Joel R., 2013. "Economic Insights Required for Using Lifecycle Analysis for Policy Decisions," 2014 Allied Social Science Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA 161654, Agricultural and Applied Economics Association.
  7. Thompson, Wyatt & Whistance, Jarrett & Meyer, Seth, 2011. "Effects of US biofuel policies on US and world petroleum product markets with consequences for greenhouse gas emissions," Energy Policy, Elsevier, vol. 39(9), pages 5509-5518, September.
  8. Mads Greaker & Michael Hoel & Knut Einar Rosendahl, 2012. "Does a renewable fuel standard for biofuels reduce climate costs?," Discussion Papers 720, Research Department of Statistics Norway.

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