The effect of biofuel on the international oil market

Gal Hochman, Deepak Rajagopal and David Zilberman

No 61722, 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado from Agricultural and Applied Economics Association

Abstract: This paper derives a method to quantify the short- to medium-run 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 lowered global gasoline and diesel 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). We illustrate that assessing the effect of biofuels assuming competitive fuel markets overestimates the reduction in fuel price, and underestimates the reduction of gasoline and diesel consumption, and therefore impact of biofuels on greenhouse gas emissions, when compared to the effect under a cartel-of-nations model. 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, compared to 2007.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 28
Date: 2010-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The Effect of Biofuels on the International Oil Market (2011)
Working Paper: The effect of biofuel on the international oil market (2010)
Working Paper: The effect of biofuel on the international oil market (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea10:61722

DOI: 10.22004/ag.econ.61722

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