Dynamic adjustment of ethanol demand to crude oil prices: implications for mandated ethanol usage

Dong Hee Suh and Charles Moss

Empirical Economics, 2017, vol. 52, issue 4, No 18, 1587-1607

Abstract: Abstract This paper examines the dynamic behavior of ethanol blenders with a focus on the substitution possibilities between ethanol and crude oil in the fuel blending sector. The estimation results of the dynamic linear logit model reveal that the dynamic adjustment in the input demand system is very sluggish. In addition, the estimation results show that an increase in gasoline output no longer raises the share of ethanol after imposing the mandated percentage standard for ethanol. The estimated price elasticities of input demand offer statistical evidence that ethanol demand is less responsive to crude oil prices in the post-ethanol-mandate period than in the pre-ethanol-mandate period. The decompositions of cross-price elasticities strongly support that the reduced elasticities of ethanol demand with respect to the price of crude oil are more attributable to the mandated percentage standard for ethanol rather than the relative price of ethanol to crude oil.

Keywords: Ethanol mandate; Ethanol blender; Dynamic adjustment; Dynamic linear logit model; Decomposition (search for similar items in EconPapers)
JEL-codes: C61 D22 D24 Q42 Q48 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s00181-016-1112-6

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