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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

Yano, Yuki and Blandford, David and Surry, Yves (2010). The Impact of Feedstock Supply and Petroleum Price Variability on Domestic Biofuel and Feedstock Markets – The Case of the United States. Uppsala: (NL, NJ) > Dept. of Economics, Sveriges lantbruksuniversitet. Working paper series / Swedish University of Agricultural Sciences, Department of Economics ; 2010:3
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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

Authors/Creators:Yano, Yuki and Blandford, David and Surry, Yves
Title:The Impact of Feedstock Supply and Petroleum Price Variability on Domestic Biofuel and Feedstock Markets – The Case of the United States
Series/Journal:Working paper series / Swedish University of Agricultural Sciences, Department of Economics (1401-4068)
Year of publishing :2010
Depositing date:25 August 2017
Number:2010:3
Number of Pages:30
Place of Publication:Uppsala
Publisher:Department of Economics, Swedish University of Agricultural Sciences
ISSN:1401-4068
Language:English
Publication Type:Report
Article category:Other scientific
Full Text Status:Public
Agris subject categories.:E Economics, development, and rural sociology > E10 Agricultural economics and policies
E Economics, development, and rural sociology > E70 Trade, marketing and distribution
P Natural resources > P05 Energy resources management
P Natural resources > P06 Renewable energy resources
Subjects:(A) Swedish standard research categories 2011 > 4 Agricultural Sciences > 405 Other Agricultural Sciences > Renewable Bioenergy Research
(A) Swedish standard research categories 2011 > 4 Agricultural Sciences > 401 Agricultural, Forestry and Fisheries > Agricultural Science
(A) Swedish standard research categories 2011 > 5 Social Sciences > 502 Economics and Business
(A) Swedish standard research categories 2011 > 5 Social Sciences
Agrovoc terms:biofuels, petroleum, subsidies, economic analysis, market prices, USA
Keywords:biofuels, subsidies, mandates, variability
URN:NBN:urn:nbn:se:slu:epsilon-e-4311
Permanent URL:
http://urn.kb.se/resolve?urn=urn:nbn:se:slu:epsilon-e-4311
ID Code:13954
Faculty:NL - Faculty of Natural Resources and Agricultural Sciences (until 2013)
Department:(NL, NJ) > Dept. of Economics
Deposited By: SLUpub Connector
Deposited On:25 Aug 2017 14:29
Metadata Last Modified:25 Aug 2017 14:29

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