Oil Price and Biofuels

Abstract

Does the increasing oil price have an impact on demand for biofuels? Does an expansion of biofuels put pressure on oil price to fall down? These are the questions frequently asked by policy makers and other stakeholders. However, the answer is ambiguous. Serra and Zilberman (2013) surveyed 45 studies published during 2007–2012 period, which mostly used time series data, to analyze biofuel related price transmission. Only two out of the 45 studies found an impact of biofuels on fossil fuel prices in the long-run. Twenty of those studies found that energy prices influence agricultural commodities’ prices. One can argue that since feedstock costs represent more than half of the total production costs of crop-based biofuels, energy prices would impact prices of biofuels. However, existing literature have mixed findings on the relationship between oil price rise and increased prices for agriculture commodity. While some studies, such as Ciaian and Kancs (2011), Mallory et al. (2012) show the transmission of increased energy prices to agricultural commodity prices, others studies, such as Cha and Bae (2011), Hassouneh et al. (2012) find no such relationship in the long-run. This implies that increased oil price would cause substitution of petroleum products with biofuels in the long-run thereby increasing their penetration in the global energy mix. Timilsina et al. (2011) find, in the United States for example, that around a 50 % rise in oil price in 2020 from 2009 level would increase biofuel use to the level that the country has targeted through its blending mandate.