IDEAS home Printed from https://ideas.repec.org/p/cdl/agrebk/qt0k93s7zg.html
   My bibliography  Save this paper

The effect of biofuel on the international oil market

Author

Listed:
  • Hochman, Gal
  • Rajagopal, Deepak
  • Zilberman, David D.

Abstract

This 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-�firms 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-�firms model. Finally, we illustrate that a 20% increase in fuel demand more than doubles the impact of biofuels on fuel markets.

Suggested Citation

  • 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.
  • Handle: RePEc:cdl:agrebk:qt0k93s7zg
    as

    Download full text from publisher

    File URL: https://www.escholarship.org/uc/item/0k93s7zg.pdf;origin=repeccitec
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Wallace E. Tyner & Farzad Taheripour, 2008. "Policy Options for Integrated Energy and Agricultural Markets ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 387-396.
    2. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    3. A.F Alhajji & David Huettner, 2000. "OPEC and World Crude Oil Markets from 1973 to 1994: Cartel, Oligopoly, or Competitive?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 31-60.
    4. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, vol. 29(1), pages 113-134.
    5. Rajagopal, Deepak & Zilberman, David, 2008. "Environmental, Economic and Policy Aspects of Biofuels," Foundations and Trends(R) in Microeconomics, now publishers, vol. 4(5), pages 353-468, October.
    6. 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.
    7. Moran, Theodore H., 1981. "Modeling OPEC behavior: economic and political alternatives," International Organization, Cambridge University Press, vol. 35(2), pages 241-272, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Antonio M. Bento, Richard Klotz, and Joel R. Landry, 2015. "Are there Carbon Savings from US Biofuel Policies? The Critical Importance of Accounting for Leakage in Land and Fuel Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Gal Hochman & David Zilberman, 2018. "Corn Ethanol and U.S. Biofuel Policy 10 Years Later: A Quantitative Assessment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(2), pages 570-584.
    3. Hochman, Gal & Zilberman, David, 2015. "The political economy of OPEC," Energy Economics, Elsevier, vol. 48(C), pages 203-216.
    4. 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.
    5. Klotz, Richard & Bento, Antonio M. & Landry, Joel R., 2013. "Economic Insights Required for Using Lifecycle Analysis for Policy Decisions," 2014 Allied Social Sciences Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA 161654, Agricultural and Applied Economics Association.
    6. U. Martin Persson, 2015. "The impact of biofuel demand on agricultural commodity prices: a systematic review," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 4(5), pages 410-428, September.
    7. Mads Greaker & Michael Hoel & Knut Einar Rosendahl, 2014. "Does a Renewable Fuel Standard for Biofuels Reduce Climate Costs?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(3), pages 337-363.
    8. Chen, Xiaoguang & Huang, Haixiao & Khanna, Madhu & Önal, Hayri, 2014. "Alternative transportation fuel standards: Welfare effects and climate benefits," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 241-257.
    9. Philip Abbott, 2014. "Biofuels, Binding Constraints, and Agricultural Commodity Price Volatility," NBER Chapters, in: The Economics of Food Price Volatility, pages 91-131, National Bureau of Economic Research, Inc.
    10. Ram N. Acharya & Rafael Perez-Pena, 2020. "Role of Comparative Advantage in Biofuel Policy Adoption in Latin America," Sustainability, MDPI, vol. 12(4), pages 1-13, February.
    11. Hill, Jason & Tajibaeva, Liaila & Polasky, Stephen, 2016. "Climate consequences of low-carbon fuels: The United States Renewable Fuel Standard," Energy Policy, Elsevier, vol. 97(C), pages 351-353.
    12. Doshi, Amar & Pascoe, Sean & Coglan, Louisa & Rainey, Thomas J., 2016. "Economic and policy issues in the production of algae-based biofuels: A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 64(C), pages 329-337.
    13. Maura Allaire and Stephen P. A. Brown, 2015. "The Green Paradox of U.S. Biofuel Subsidies: Impact on Greenhouse Gas Emissions," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    14. Sexton, Steven & Eyer, Jonathan, 2016. "Leveling the playing field of transportation fuels: Accounting for indirect emissions of natural gas," Energy Policy, Elsevier, vol. 95(C), pages 21-31.
    15. 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, vol. 16(2), pages 1-13, September.
    16. 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.
    17. Karel Janda & Ladislav Krištoufek, 2019. "The Relationship Between Fuel and Food Prices: Methods and Outcomes," Annual Review of Resource Economics, Annual Reviews, vol. 11(1), pages 195-216, October.
    18. Gal Hochman & Chrysostomos Tabakis, 2020. "Biofuels and Their Potential in South Korea," Sustainability, MDPI, vol. 12(17), pages 1-17, September.
    19. Rajagopal, Deepak & Zilberman, David, 2013. "On market-mediated emissions and regulations on life cycle emissions," Ecological Economics, Elsevier, vol. 90(C), pages 77-84.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hochman, Gal & Zilberman, David, 2015. "The political economy of OPEC," Energy Economics, Elsevier, vol. 48(C), pages 203-216.
    2. Kaushik Ranjan Bandyopadhyay, 2022. "Oil and Gas Markets and COVID-19: A Critical Rumination on Drivers, Triggers, and Volatility," Energies, MDPI, vol. 15(8), pages 1-21, April.
    3. Bandyopadhyay, Kaushik Ranjan, 2009. "Does OPEC act as a Residual Producer?," MPRA Paper 25841, University Library of Munich, Germany, revised 2010.
    4. Golombek, Rolf & Irarrazabal, Alfonso A. & Ma, Lin, 2018. "OPEC's market power: An empirical dominant firm model for the oil market," Energy Economics, Elsevier, vol. 70(C), pages 98-115.
    5. Robert Socha & Piotr Wdowiński, 2018. "Tendencje zmian cen na światowym rynku ropy naftowej po 2000 roku," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 103-135.
    6. O'Rear, Eric G. & Sarica, Kemal & Tyner, Wallace E., 2015. "Analysis of impacts of alternative policies aimed at increasing US energy independence and reducing GHG emissions," Transport Policy, Elsevier, vol. 37(C), pages 121-133.
    7. Ben Salem, Leila & Nouira, Ridha & Jeguirim, Khaled & Rault, Christophe, 2022. "The determinants of crude oil prices: Evidence from ARDL and nonlinear ARDL approaches," Resources Policy, Elsevier, vol. 79(C).
    8. Ma, Lin, 2018. "Importance of Demand and Supply Shocks for Oil Price Variations," Working Paper Series 10-2018, Norwegian University of Life Sciences, School of Economics and Business.
    9. Chen, Yu-Fu & Mu, Xiaoyi, 2021. "Asymmetric volatility in commodity markets," Journal of Commodity Markets, Elsevier, vol. 22(C).
    10. A. Talha Yalta, 2016. "Bootstrap Inference of Level Relationships in the Presence of Serially Correlated Errors: A Large Scale Simulation Study and an Application in Energy Demand," Computational Economics, Springer;Society for Computational Economics, vol. 48(2), pages 339-366, August.
    11. Al Rousan, Sahel & Sbia, Rashid & Tas, Bedri Kamil Onur, 2018. "A dynamic network analysis of the world oil market: Analysis of OPEC and non-OPEC members," Energy Economics, Elsevier, vol. 75(C), pages 28-41.
    12. Even Comfort Hvinden, 2019. "OPEC's crude game," Working Papers No 10/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    13. Parnes, Dror, 2019. "Heterogeneous noncompliance with OPEC's oil production cuts," Energy Economics, Elsevier, vol. 78(C), pages 289-300.
    14. Cologni, Alessandro & Manera, Matteo, 2014. "On the economic determinants of oil production," Energy Economics, Elsevier, vol. 44(C), pages 68-79.
    15. A. Talha Yalta, 2013. "Small Sample Bootstrap Inference of Level Relationships in the Presence of Autocorrelated Errors: A Large Scale Simulation Study and an Application in Energy Demand," Working Papers 1301, TOBB University of Economics and Technology, Department of Economics.
    16. Coleman, Les, 2012. "Explaining crude oil prices using fundamental measures," Energy Policy, Elsevier, vol. 40(C), pages 318-324.
    17. McPhail, Lihong Lu & Babcock, Bruce A., 2012. "Impact of US biofuel policy on US corn and gasoline price variability," Energy, Elsevier, vol. 37(1), pages 505-513.
    18. Elmarzougui, Eskandar & Larue, Bruno, 2011. "On the Evolving Relationship between Corn and Oil Prices," Working Papers 118580, University of Laval, Center for Research on the Economics of the Environment, Agri-food, Transports and Energy (CREATE).
    19. Reynolds, Douglas B. & Pippenger, Michael K., 2010. "OPEC and Venezuelan oil production: Evidence against a cartel hypothesis," Energy Policy, Elsevier, vol. 38(10), pages 6045-6055, October.
    20. Tyner, Wallace E. & Taheripour, Farzad & Perkis, David, 2010. "Comparison of fixed versus variable biofuels incentives," Energy Policy, Elsevier, vol. 38(10), pages 5530-5540, October.

    More about this item

    Keywords

    Energy; OPEC; biofuel; fuel; carbon savings; optimal export tax model; cheap oil; Social and Behavioral Sciences;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdl:agrebk:qt0k93s7zg. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lisa Schiff (email available below). General contact details of provider: https://edirc.repec.org/data/dabrkus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.