Demand for Ethanol in the Face of Blend Wall: Is it a Complement or a Substitute for Conventional Transportation Fuel in the United States?

United States spends more than one quarter of its energy on transportation. Historically, crude oil has been the primary source for generating this energy. Though ethanol has been proposed to substitute conventional transportation fuel since the 1970s, the expansion of ethanol industry slowed down after 2010 when the ethanol blended reached around 10% of the total gasoline, the so-called “blend-wall effect”. This study focused on estimating the demand for ethanol in the United States and analyzed the effect of blend-wall on this demand and its relationship to conventional fuels. The almost ideal demand model (AIDS) is adopted to analyze the US expenditure on transportation fuels including petroleum, natural gas and biomass energy. Both monthly and annual data are collected and the presence of unit roots at different frequencies (monthly, quarterly, annually) is identified and used to help improve the structural model. Preliminary results showed that, though ethanol was proposed as a substitute for gasoline, the substitution effect faded away as the ethanol share in the blend increased, and turning ethanol to be a complement under the state-of-the-art technology.

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Conference Paper/ Presentation
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JEL Codes:
Q41; Q42

 Record created 2017-04-01, last modified 2018-01-23

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