Three essays on U.S. corn-based fuel ethanol markets
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This study investigates three related issues on U.S. corn-based fuel ethanol markets. The primary objectives involve measuring economic consequences of relaxating the blend wall, building a theoretical framework for the inter-linkage between the fuel and food markets, analyzing the fuel vs. food literature, methodologies and policies for the food before fuel nexus, and addressing the food before fuel debate by empirical studies. The first essay, submitted to Energy Economics, is a companion paper of our previous work published in Energy Policy (2011). Based on the theoretical model, empirical studies employing both benchmark value calculations and Monte Carlo simulations are conducted. Our results reveal an anomaly where a relaxation of this blend wall elicits a demand response. Under a wide range of elasticities, this demand response can actually increase the consumption of petroleum gasoline and thus lead to greater energy insecurity. The second essay, published in Biofuel/Book 1, InTech, lays out evidence in support of the hypothesis that the 2007-2008 food before fuel crisis was caused not by growing demand for biofuels but instead by the shift in global policies toward relying primarily on markets to provide adequate agricultural commodities in periods of sharp increases in food demand. Based on this hypothesis and economic theory, policies to advert future food before fuel crises or any other causes of food price volatilities and literature reviews of methodolies are developed. The third essay, published in Energy Economics, employs a Structural Vector Autoregression (SVAR) model along with a Direct Acyclic Graph to conduct an empirical analysis on the inter-linkage between the food and fuel markets. The results support the hypothesis that fundamental market forces of demand and supply are the main drivers of food price volatility. Increased biofuel production may cause short-run food price increases but not long-run price shifts. Decentralized freely operating markets will mitigate the persistence of any price shocks and restore prices to their long-run trends.