OPEC, biofuel, and food prices

Some traditional models of energy markets assume that they are competitive; others assume that OPEC is a cartel of firms. But OPEC is a cartel of nations. Building on these observations, which we support empirically, we use a simulation to assess the impacts of introducing ethanol (under various levels of mandates and subsidies) on fuel and food markets, while recognizing the importance of storage markets and its impact on food markets. Our results suggest that the current levels of ethanol production contribute to significant reduction in domestic fuel subsidies in OPEC countries and reduce prices of fuel in the rest of the world by about 1-2%. The reduction in fuel prices has a direct effect of increased supply, and an indirect effect of reduced monopoly power of OPEC. Other parts of the analysis estimate the effects of ethanol on food markets and domestic fuel consumers. Here, we find that fuel consumers benefited from the introduction of ethanol- when it is subsidized, but less when its production is induced by mandates. Food consumers suffered while crop producers benefited from high food prices. One factor that affects the outcome is the change in agricultural productivity, which may depend on the extent that biotechnology is introduced. The negative impacts of biofuel on consumers may decline significantly and its potential to contribute to the fuel market depends drastically on these productivity assumptions. Overall, the net effect of biofuel polices on consumers and producers of fuel and food depend on assumptions about elasticities in various markets, the changes in farm productivity and the behavior of OPEC.