Economic Effects of Oil Price Shocks on Biodiesel Production: The Complementarity of Biodiesel and Petroleum
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The increasing volatility of international crude oil prices has induced petroleum-addicted countries to increase the production of alternative fuels. In the initial stage of alternative fuel promotion, a careful institutional mechanism is crucial for the commercial success of alternative fuels. Koreahas successfully commercialized biodiesel as an alternative to petrodiesel. Most of the biodiesel distributed in Korea has been in the formof BD5 (blend of maximum 5% biodiesel), not BD20 (blend of 20% biodiesel and 80% petroleum diesel). Whereas BD5 is used as intermediate inputs to petrodiesel, BD20 is directly consumed by car drivers. This study attempts to quantify the economic effects of increases in international oil prices on Korea’s energy and biodiesel industry by using a small open computable general equilibrium (CGE) model for Korea. The results indicate that increases in oil prices would dramatically reduce GDP and consumer welfare. Biodiesel and petroleum production as well as the transportation sector could decline dramatically because biodiesel (BD5) would be consumed mainly as intermediate inputs to petrodiesel. These results suggest that because the Korean economy is vulnerable to the volatility of crude oil prices, an independent and separate alternative fuel industry should be fostered to improve the substitutability of alternative fuels.
Abstract
The increasing volatility of international crude oil prices has induced petroleum-addicted countries to increase the production of alternative fuels. In the initial stage of alternative fuel promotion, a careful institutional mechanism is crucial for the commercial success of alternative fuels. Koreahas successfully commercialized biodiesel as an alternative to petrodiesel. Most of the biodiesel distributed in Korea has been in the formof BD5 (blend of maximum 5% biodiesel), not BD20 (blend of 20% biodiesel and 80% petroleum diesel). Whereas BD5 is used as intermediate inputs to petrodiesel, BD20 is directly consumed by car drivers. This study attempts to quantify the economic effects of increases in international oil prices on Korea’s energy and biodiesel industry by using a small open computable general equilibrium (CGE) model for Korea. The results indicate that increases in oil prices would dramatically reduce GDP and consumer welfare. Biodiesel and petroleum production as well as the transportation sector could decline dramatically because biodiesel (BD5) would be consumed mainly as intermediate inputs to petrodiesel. These results suggest that because the Korean economy is vulnerable to the volatility of crude oil prices, an independent and separate alternative fuel industry should be fostered to improve the substitutability of alternative fuels.
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