Factor Demand Analysis for Ethanol in the U.S. Refinery Industry

Ethanol is increasingly being used as a gasoline oxygenate and a volume extender in the refinery and blender industry in the U.S. This paper estimates refinery and blender factor demand and evaluates price responsiveness of inputs. The study also tests hypotheses regarding existence of structural change in the industry’s demand for inputs. It determines the common shift point and adjustment rate characterizing the transition path of structural change for the set of inputs using gradual switching multivariate regression techniques and maximum likelihood methods. Results suggest structural change in factor demand for inputs in the refinery and blender industry has been initiated in January 2001 at slow adjustment rates. Results also suggest that with the exception of labor and capital, demand responsiveness for inputs to own price changes has decreased over time. The Hicks-Allen cross price elasticity estimates also suggests role-reversal for usage of ethanol in the refinery industry across regimes, with the latter being increasingly used as a substitute than as a complement with time.