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Abstract

We explore the role of biofuels in mitigating the negative impacts of oil supply shocks on fuel markets under a range of oil price trajectories and biofuel blending mandate levels. Using a partial equilibrium model of US biofuels production and petroleum fuels trade, we discuss the adjustments in light‐duty vehicle fuel mix, fuel prices, and renewable identification number (RIN) prices following each shock as well as the distribution of shock costs across market participants. Ethanol is used as both a complement (blend component in E10) and a substitute (in E15 and E85 blends) to gasoline. Results show that, during oil supply shocks, the role of ethanol as a substitute dominates and allows some mitigation of the shock. As US petroleum imports decrease with growing US oil production, the net economic welfare effect of sudden oil price changes and the energy security role of biofuels becomes less clear than it has been in the past. Although fuel consumers lose when oil price increases due to an external shock, domestic fuel producers gain. In some cases, depending on import share and supply and demand elasticities, we show that the gain to producers could more than offset consumer losses. However, in most cases evaluated here, sudden oil‐price increases remain costly. © 2018 Society of Chemical Industry and John Wiley & Sons, Ltd

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... Biobased reactions from forest residues provide a suitable method to reduce lifecycle emissions and lessen cost fluctuations for transportation fuels and sectors of the commercial chemical industry. 1,2 While other solutions such as solar and wind farms can provide clean power in the form of electricity, biobased production provides a practical solution for the transportation industry, as additives and blendstocks could be produced as 'drop-in' fuels that would be compatible with existing technology. Further, many modern materials require chemicals derived from petroleum products; again, biobased chemical production is uniquely suited to provide an alternative solution and is perhaps one of the only practical solutions. ...
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Article
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Chapter
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Article
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Article
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Chapter
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This paper examines the persistence of shocks to world commodity prices, using monthly IMF data on primary commodities between 1957-98. We find that shocks to commodity prices are typically long-lasting and the variability of the persistence of price shocks is quite wide. The paper also discusses the implications of these findings for national and international schemes to stabilize earnings from commodity exports and finds that if price shocks are long-lived, then the cost of stabilization schemes will likely exceed any associated smoothing benefits. Copyright 2000, International Monetary Fund
Article
This paper examines the persistence of shocks to world commodity prices, using monthly IMF data on primary commodities between 1957-98. We find that shocks to commodity prices are typically long-lasting and the variability of the persistence of price shocks is quite wide. The paper also discusses the implications of these findings for national and international schemes to stabilize earnings from commodity exports and finds that if price shocks are long-lived, then the cost of stabilization schemes will likely exceed any associated smoothing benefits.
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In investing in a new venture, companies aim to increase their competitiveness and generate value in scenarios where volatile markets, geopolitical instabilities, and disruptive technologies create uncertainty and risk. The biobased industry poses additional challenges as it competes in a mature, highly efficient market, dominated by petroleum-based companies, and faces significant feedstock availability and variability constraints, limited technological data, and uncertain market conditions for newly developed products. Thus, decision-making strategies and processes for these investment projects must consider solid risk estimation and mitigation measures. Focusing on the biobased industrial sector, this paper critically reviews state-of-the-art probabilistic and deterministic methodologies for assessing financial risk; discusses how a complete risk analysis should be performed; and addresses risk management, listing major risks and possible mitigation strategies. © 2017 Society of Chemical Industry and John Wiley & Sons, Ltd
Article
This article examines how the shale oil revolution has shaped the evolution of U.S. crude oil and gasoline prices. It puts the evolution of shale oil production into historical perspective, highlights uncertainties about future shale oil production, and cautions against the view that the U.S. may become the next Saudi Arabia. It then reviews the effects of the ban on U.S. crude oil exports, of capacity constraints in refining and transporting crude oil, of differences in the quality of conventional and unconventional crude oil, and of the recent regional fragmentation of the global market for crude oil on the determination of U.S. oil and gasoline prices. It discusses the reasons for the persistent wedge between U.S. crude oil prices and global crude oil prices in recent years and for the fact that domestic oil prices below global levels have not translated to lower U.S. gasoline prices. It also examines the role of shale oil in causing the 2014 oil price decline. Finally, it explains why the shale oil revolution unlike the shale gas revolution is unlikely to stimulate a U.S. boom in oil-intensive manufacturing industries, and it explores more generally the implications of the shale oil revolution for the U.S. economy.
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Several studies have highlighted that one of the largest risks with cellulosic biorefinery investments are year-to-year variability in cellulosic biomass quantity available. Yet, strategies to mitigate these risks in biofuel development are less understood. In the absence of strategies to minimize the impact due to these variations, both biorefineries and farmers venturing into the cellulosic biofuel arena will be significantly exposed. Studies have been done on using engineering approaches, such as biomass pre-treatment and storage to address biomass supply variations. Recent studies have provided market structure and contracting strategies to manage biomass supply risks. However, storage, pre-treatment and similar engineering approaches lead to higher costs and has other limitations such as additional infrastructural requirements. There is a gap in understanding the use of feedstock (biomass) diversification and portfolio strategies to mitigate such risks. In this study a portfolio approach is developed and applied to the case of the US Corn Belt, considering various types of cellulosic biomass including corn stover, wheat straw, and switchgrass. It is found that feedstock diversification mitigates up to 40% of feedstock supply variations, while biorefinery diversification can mitigate up to 70% of feedstock supply variations although it is constrained by current cropland use patterns in the region. Overall, diversification and portfolio strategies present an effective way for mitigating risks associated with feedstock supply variations.
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This article examines how the shale oil revolution has shaped the evolution of U.S. crude oil and gasoline prices. It puts the increased production of shale oil into historical perspective, highlights uncertainties about future shale oil production, and cautions against the view that the United States will become the next Saudi Arabia. It then reviews how the ban on U.S. crude oil exports, capacity constraints in refining and transporting crude oil, and the regional fragmentation of the global market for crude oil after 2010 have affected U.S. oil and gasoline prices. In particular, the article discusses the reasons for the persistent wedge between U.S. and global crude oil prices in recent years, explains why domestic oil trading at a discount has not lowered U.S. gasoline prices, and discusses the role of shale oil in causing the 2014 oil price decline. Finally, the article explores the implications of the shale oil revolution for the U.S. economy and explains why increased shale oil production is unlikely to create a boom in oil-intensive U.S. manufacturing industries.
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The importance of reducing U.S. oil dependence may have changed in light of developments in the world oil market over the past two decades. Since 2005, increased domestic production and decreased oil use have cut U.S. import dependence in half. The direct costs of oil dependence to the U.S. economy are estimated under four U.S. Energy Information Administration Scenarios to 2040. The key premises of the analysis are that the primary oil market failure is the use of market power by OPEC and that U.S. economic vulnerability is a result of the quantity of oil consumed, the lack of readily available, economical substitutes and the quantity of oil imported. Monte Carlo simulations of future oil market conditions indicate that the costs of U.S. oil dependence are likely to increase in constant dollars but decrease relative to U.S. gross domestic product unless oil resources are larger than estimated by the U.S. Energy Information Administration. Reducing oil dependence therefore remains a valuable goal for U.S. energy policy and an important co-benefit of mitigating greenhouse gas emissions.
Article
Policymakers in the USA have provided various mechanisms to grow the domestic biofuel industry. One of the most significant policies in the USA is the volume mandate specified within the Renewable Fuel Standard (RFS). There are a number of other overlapping factors that impact the use of biofuels, namely the so-called blend wall, or the 10% blend limit of ethanol in gasoline, along with a complex system of tax credits. All of these policies directly affect the value of a Renewable Identification Number (RIN), the tradable compliance certificate created as part of the RFS. Regulators track RIN prices carefully because they are a measure of the cost of compliance. In this work a mixed complementarity problem (MCP) is presented to combine these market dynamics into one model. This tool was specifically designed for policymakers to compare scenarios and study the effects on key market variables including RIN, gasoline, and diesel prices, along with production quantities for a number of different finished blended fuels. Our results suggest that RIN prices will increase with an increase in the volume of biofuel mandated by the Environmental Protection Agency (EPA); however the behavior of the different RIN prices depends on how the biofuel volumes are assigned among all the subcategories. Under scenarios investigated in this study, it is likely that a primary compliance strategy is to blend more biodiesel into diesel fuel. This behavior would increase the price of the D4 RIN but the premium could be mitigated by reinstating the biodiesel production tax credit. © 2015 Society of Chemical Industry and John Wiley & Sons, Ltd
Article
Kenneth A. Small and Kurt Van Dender* Department of Economics University of California, Irvine Irvine, CA 92697-5100 ksmall@uci.edu, kvandend@uci.edu ... This version: April 10, 2006 (corrected July 17, 2006 and August 18, 2007) ... Shorter version published, Energy ...
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Macroeconomic shocks such as wil price increases induce a systematic (endogenous) response of monetary policy. We develop a VAR-based technique for decomposing the total economic effects of a given exogenous shock into the portion attributable directly to the shock and the part arising from the policy response to the shock.
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World oil supply disruptions lead to U.S. economic losses. Because oil is fungible in an integrated world oil market, increased oil consumption, whether from domestic or imported sources, increases the economic losses associated with oil supply disruptions. Nevertheless, increased U.S. oil production expands stable supplies and dampens oil price shocks, whereas increased U.S. oil imports boosts the share of world oil supply that comes from unstable producers and exacerbates oil price shocks. Some of the economic losses associated with oil supply disruptions - gross domestic product losses and some transfers abroad - are externalities that can be quantified as oil security premiums. To estimate such premiums for domestic and imported oil, we take into account projected world oil market conditions, probable oil supply disruptions, the market response to oil supply disruptions, and the resulting U.S. economic losses. Our estimates quantify the security externalities associated with increased oil use, which derive from the expected U.S. economic losses resulting from potential disruptions in world oil supply.
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A biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices, depending on relative supply elasticities. Biofuel tax credits always reduce fuel prices. Tax credits result in lower fuel prices than under a mandate for the same level of biofuel production. If tax credits are implemented alongside mandates, then tax credits subsidize fuel consumption instead of biofuels. This contradicts energy policy goals by increasing oil dependency, CO2 emissions, and traffic congestion, while providing little benefit to either corn or ethanol producers. These social costs will be substantial with tax credits costing taxpayers $28.7 billion annually by 2022.
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The US trade policy for ethanol affects imports and all aspects of ethanol production and use. The paper reviews U.S. trade policy for ethanol and then examines the pattern of imports of ethanol. Despite high tariff barriers the U.S. is a major ethanol importer and we document the pattern of ethanol imports over the past decades. We then show how ethanol imports have responded to market conditions. We find that the demand for imports is likely to have been very elastic in recent years. Our econometric estimates show how ethanol imports have responded to market conditions. We find a significant supply elasticity for imports into the U.S. of about 3.0. Finally we use the forgoing analysis to discuss potential impacts of trade policy changes under alternative market conditions that depend crucially on domestic biofuel policies.
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The recent increase in ethanol use in the US strengthens and changes the nature of links between agricultural and energy markets. Here, we explore the interaction of market volatility and the scope for policy to affect this interaction, with a focus on how corn yields and petroleum prices affect ethanol prices. Mandates associated with new US energy legislation may intervene in these links in the medium-term future. We simulate stochastically a structural model that represents these markets, and that includes mandates, in order to assess how shocks to corn or oil markets can affect ethanol price and use. We estimate that the mandate makes ethanol producer prices more sensitive to corn yields and less sensitive to changes in petroleum prices overall. We note a discontinuity in these links that is caused by the mandate. Ethanol use can exceed the mandate if petroleum prices and corn yields are high enough, but the mandate limits downside adjustments in ethanol use to low petroleum prices or corn yields.
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The paper proposes a new measure of exogenous oil supply shocks. The timing, the magnitude, and the sign of this measure may differ greatly from current state-of-the-art estimates. It is shown that only a small fraction of the observed oil price increases during oil crisis periods can be attributed to exogenous oil production disruptions. Exogenous oil supply shocks cause a sharp drop of U.S. real GDP growth after five quarters rather than an immediate and sustained reduction in economic growth and a spike in CPI inflation after three quarters. Overall, exogenous oil supply shocks made remarkably little difference for the evolution of the U.S. economy since the 1970s, although they did matter for some historical episodes. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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The world oil market is regarded by many as a puzzle. Why are oil prices so volatile? What is OPEC and what does OPEC do? Where are oil prices headed in the long run? Is “peak oil” a genuine concern? Why did oil prices spike in the summer of 2008, and what role did speculators play? Any attempt to answer these questions must be informed and disciplined by economics. Such is the purpose of this essay: to illuminate recent developments in the world oil market from the perspective of economic theory.
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Standard real business cycle models must rely on total factor productivity (TFP) shocks to explain the observed comovement of consumption, investment, and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption can generate comovement in the absence of TFP shocks. Intertemporal substitution of goods and leisure induces comovement over the business cycle through heterogeneity in the consumption behavior of employed and unemployed workers. This result owes to two model features introduced to capture important characteristics of U.S. labor market data. First, individual consumption is affected by the number of hours worked: Employed agents consume more on average than the unemployed do. Second, changes in the employment rate, a central factor explaining variation in total hours, affect aggregate consumption. Demand shocks--such as shifts in the marginal efficiency of investment, as well as government spending shocks and news shocks--are shown to generate economic fluctuations consistent with observed business cycles.
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