Three essays on biofuel's and fossil fuel's stochastic prices

The dissertation consists of three essays on biofuel's and fossil fuel's stochastic prices focusing on the U.S. corn-based fuel-ethanol market. The research objectives include investigating competitive structures in the alternative fuels market, selecting dynamic efficient portfolios based on policy preferences, and revealing prices and price volatilities relationships among energy and agricultural markets. The first essay, published in Agricultural Economics, employs a structural vector autoregression (SVAR) model of the ethanol fuel market to test the limit-pricing hypothesis that may explain the lack of ethanol entry into the fuel-additives market. The results support the hypothesis of limit- pricing behavior on the part of MTBE (methyl tertiary butyl ether) refiners, and suggest that the U.S. corn-based ethanol industry is vulnerable to limit-price competition, which could recur. Without federal support, U.S. ethanol refiners may find it difficult to compete with cheaper sugar-cane-refined ethanol, chiefly from Brazil. The second essay, published in American Journal of Agricultural Economics, builds dynamic fuel portfolios yielding diversification among petroleum gasoline, U.S. fuel ethanol, and Brazilian ethanol by employing a multivariate generalized autoregressive conditional heteroskedascity (MGARCH) model. Results indicate that if the U.S. develops a comprehensive auto fuel policy, gasoline price fluctuations can be decreased with a corresponding reduction in vehicle environmental costs. Results led to the discovery that shifting policies toward encouraging the use of biofuels (ethanol), fuel-price volatility can be reduced with an associated overall higher gasoline price. When accounting for vehicle environmental costs (local air quality, congestion, and accidents), this higher gasoline price may be socially desirable. The third essay, submitted for publication, investigates long-run equilibrium and short-run dynamic relations between U.S. energy (oil, gasoline, and ethanol) prices and U.S. agricultural commodity (corn and soybeans) prices, as well as price volatilities relations among these markets using vector error correction models (VECM) and MGARCH models. Results indicate there is no long-run equilibrium (cointegrating) relationship between energy prices and agricultural commodity prices. However, short-run price temporal causalities between energy prices and agricultural commodity prices are found using a VECM model. In terms of price volatilities, results indicate that agricultural commodity price volatilities influence energy price volatilities.