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The Impact of Feedstock Supply and Petroleum Price Variability on Domestic Biofuel and Feedstock Markets – The Case of the United States

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  • Yano, Yuki
  • Blandford, David
  • Surry, Yves R.

Abstract

The promotion of biofuel use in preference to traditional petroleum-based transportation fuel has linked agricultural commodity markets and energy markets more closely together. Biofuel policies can involve multiple policy instruments, but studies examining their effects on biofuel feedstock and energy markets are scarce. In addition, the impact of alternative policy approaches in the context of variability in petroleum prices and the supply of biofuel feedstock has received limited attention. Focusing on the current situation in the United States, in which prohibitively high duties prevent imports of ethanol, this paper examines how variability in the price of petroleum and corn supply affects domestic market variability under three types of domestic policies, inclusive of their combinations, for promoting the use of ethanol: 1) the provision of a fixed subsidy (tax credit) for blending ethanol with gasoline; 2) the use of a blending mandate; and 3) the use of a consumption mandate. Varying relative variability in petroleum price and corn supply, we analyze numerically the implications of changes in domestic biofuel policy for variability (measured by the coefficient of variation) in ethanol use and corn prices. We also provide some brief insights into the design of market stabilization policies. Results obtained from Monte Carlo simulations show that in the absence of mandates the quantity of ethanol used under a subsidy policy is highly susceptible to fluctuations in oil prices and corn supply, providing that there are no constraints to adjustment in ethanol demand. The impact of oil price fluctuations on the price of corn is large, but corn supply fluctuations have no or a small impact on the equilibrium corn price, depending on the flexibility of the use of corn in ethanol refining. This is because variations in ethanol volume absorb shocks caused by corn supply fluctuations. Consequently, high fluctuations in the price of petroleum are expected to result in high variability in the corn price in the absence of mandates. With a mandate (with or without a subsidy), as the likelihood that the mandate becomes binding increases, variability in ethanol use declines, the impact of variations in petroleum price on corn prices is reduced, and the impact of variations in corn supply on prices is accentuated. Therefore, if the mandate is likely to be binding, high fluctuations in corn supply are expected to result in high variability in the corn price. If the likelihood that ethanol use exceeds the mandated level is high, the effects are similar to those in the absence of a mandate. The effects of changes in biofuel policy, such as a reduction in the level of tax credit under a mandate and an increase in its level, on the price of corn depend on the relative magnitudes of world oil price and domestic corn supply fluctuations.

Suggested Citation

  • Yano, Yuki & Blandford, David & Surry, Yves R., 2010. "The Impact of Feedstock Supply and Petroleum Price Variability on Domestic Biofuel and Feedstock Markets – The Case of the United States," Working Papers 58486, Swedish University of Agricultural Sciences, Department of Economics.
  • Handle: RePEc:ags:suaswp:58486
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    File URL: http://purl.umn.edu/58486
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    Cited by:

    1. Pinstrup-Andersen, Per (ed.), 2016. "Food Price Policy in an Era of Market Instability: A Political Economy Analysis," OUP Catalogue, Oxford University Press, number 9780198788836.
    2. Rajcaniova, Miroslava & Drabik, Dusan & Ciaian, Pavel, 2013. "How policies affect international biofuel price linkages," Energy Policy, Elsevier, vol. 59(C), pages 857-865.
    3. Dusan Drabik & Pavel Ciaian & Jan Pokrivcak, 2014. "Biofuels and Vertical Price Transmission: The Case of the U.S. Corn, Ethanol, and Food Markets," LICOS Discussion Papers 35114, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    4. Drabik, Dušan & Ciaian, Pavel & Pokrivčák, Ján, 2016. "The effect of ethanol policies on the vertical price transmission in corn and food markets," Energy Economics, Elsevier, vol. 55(C), pages 189-199.

    More about this item

    Keywords

    biofuels; subsidies; mandates; variability; Agricultural and Food Policy; International Relations/Trade; Resource /Energy Economics and Policy;

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