Biofuel Producers in a Deregulated Market
41 Pages Posted: 28 Aug 2014 Last revised: 19 May 2017
Date Written: May 18, 2017
In the deregulated fuels market, biofuels and fossil fuels are close competitors and substitutes. Thus, biofuel producers are subject to risks due to volatile crude oil and biofuels feedstock prices. This paper proposes a two-sector fuel market with competing oil refinery and biofuel sectors, calibrated for cases of gasoline/ethanol and diesel/biodiesel. The model suggests that ethanol and biodiesel plants will shut-down approximately 40% and 20% of the time, respectively. The skewness of profits is -0.32, in contrast to the 0.91 of feedstock prices. Several firm-level and policy-level options to manage crude oil price risks for biofuel producers are discussed further.
Keywords: Price Risks, Biofuels Policies, Risk Management, Free Cash-Flow
JEL Classification: O13, Q42, G32
Suggested Citation: Suggested Citation