Entry of Alternative Fuels in a Volatile U.S. Gasoline Market

Dmitry Vedenov, James A. Duffield and Michael E. Wetzstein

No 19182, 2005 Annual meeting, July 24-27, Providence, RI from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: The hypothesis underlying this analysis is that in the presence of volatile gasoline prices competitive market forces will yield alternative, less volatile fuels as substitutes. A real-option pricing approach was employed for this analysis by modeling investment under uncertainty for the case of comparing stochastic prices of substitute commodities. Based on real options, threshold decision rules were developed for the adoption of portfolio fuels such as ethanol and conventional gasoline blends. Considering this portfolio effect, the benefit-to-cost ratios are above four for the alternative blends under varying discount rates and time horizons. This provides a strong indication that consumer demand exists for these portfolio fuels. Competitive markets will then respond to this consumer demand yielding less volatile portfolio fuels and incorporating ethanol into domestic fuel mix.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 22
Date: 2005
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Journal Article: Entry of Alternative Fuels in a Volatile U.S. Gasoline Market (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea05:19182

DOI: 10.22004/ag.econ.19182

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