The effect of biofuel on the international oil market
AbstractThis paper derives a method to quantify the 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 reduces global fossil fuel 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-ï¿½firms model). Given that the cartel-of-nations model correctly captures fuel markets, we illustrate that assessing the effect of introducing biofuels under a competitive fuel markets overestimates the reduction in fuel price, and underestimates the reduction of fossil fuel consumption, and therefore the reduction of greenhouse gas emissions. Similar conclusions are derived with respect to cartel-of-ï¿½firms model. Finally, we illustrate that a 20% increase in fuel demand more than doubles the impact of biofuels on fuel markets.
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Bibliographic InfoPaper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt0k93s7zg.
Date of creation: 10 Mar 2010
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Energy; OPEC; biofuel; fuel; carbon savings; optimal export tax model; cheap oil; Social and Behavioral Sciences;
Other versions of this item:
- 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.
- Hochman, Gal & Rajagopal, Deepak & Zilberman, David, 2010. "The effect of biofuel on the international oil market," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61722, Agricultural and Applied Economics Association.
- F1 - International Economics - - Trade
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
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