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Do structural shocks in the crude oil market affect biofuel prices?

Author

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  • Aktham I. Maghyereh
  • Osama D. Sweidan

Abstract

Literature shows that the crude oil market has a vital link with subcomponents products, i.e., gasoline and diesel, and alternative energy markets, i.e., natural gas and biofuels. The biofuel industry is a promising solution for many problems such as global warming and high oil prices. Therefore, our paper explores the effect of structural crude oil market shocks on the real price of biofuel. We use structural vector autoregression (SVAR) model as proposed by Kilian (2009) over the period from March 1995 to June 2019. Our main finding reveals that long-run fluctuations in the real prices of biofuel are attributed mainly to global demand shocks and oil-market specific shocks, whereas oil supply shocks have an insignificant role. Our results also indicate that the three shocks combined can justify 68 percent of the variation in the real prices of biofuel, whereas the aggregate demand shocks are the most significant contributor because it justifies 35 percent, and oil-specific demand shocks explain 28 percent. The policy implication of our paper is that the stability of the biofuel market comes from the demand side, not the supply side. Thus, energy demand management is a critical tool to stabilize the biofuel market.

Suggested Citation

  • Aktham I. Maghyereh & Osama D. Sweidan, 2020. "Do structural shocks in the crude oil market affect biofuel prices?," International Economics, CEPII research center, issue 164, pages 183-193.
    • Handle: RePEc:cii:cepiie:2020-q4-164-11
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    Cited by:

    1. de Paula Leite, Ana Catarina & Pimentel, Liliana Marques & de Almeida Monteiro, Leandro, 2025. "Hedging in the second-generation biofuels market: Insights from UCOME," Renewable Energy, Elsevier, vol. 245(C).
    2. Attílio, Luccas Assis & Faria, João Ricardo & Rodrigues, Mauro & Silva, Emilson, 2025. "Spillover effects from oil markets on international ethanol markets and Chinese electricity production," Energy Policy, Elsevier, vol. 207(C).
    3. Karkowska, Renata & Urjasz, Szczepan, 2024. "Importance of geopolitical risk in volatility structure: New evidence from biofuels, crude oil, and grains commodity markets," Journal of Commodity Markets, Elsevier, vol. 36(C).
    4. Maghyereh, Aktham & Ziadat, Salem Adel & Al Rababa'a, Abdel Razzaq A., 2024. "Exploring the dynamic connections between oil price shocks and bond yields in developed nations: A TVP-SVAR-SV approach," Energy, Elsevier, vol. 306(C).
    5. de Paula Leite, Ana Catarina & Pimentel, Liliana Marques & de Almeida Monteiro, Leandro, 2024. "Impact of agricultural and energy prices on the biofuels market through a VAR-VEC model," Renewable Energy, Elsevier, vol. 232(C).
    6. Jin Zhang & Zhenqing Lin & Jinkai Li, 2024. "Analyzing the risk spillovers of international crude oil on China's corn and biofuel ethanol markets: A transition toward green economy and environmental sustainability," Energy & Environment, , vol. 35(3), pages 1216-1234, May.
    7. Maghyereh, Aktham & Abdoh, Hussein, 2021. "The impact of extreme structural oil-price shocks on clean energy and oil stocks," Energy, Elsevier, vol. 225(C).

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    Keywords

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    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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