ASSA meetings January 2010 1 Is Biofuel the Culprit : OPEC food and fuel
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چکیده
Session title: Agriculture and Energy: new direct and indirect links can lead to unintended consequences The food commodity price boom of 2003-08 was the most notable in the last several decades. It substantially impacted global economic activity. It affected developing nations by impacting real output, the balance of payments, government budgetary positions and most importantly the well being of the very poor (Troslte, 2008). High Commodity prices also affected developed countries, by transmitting business cycle disturbances and creating inflationary pressures (Borenzstein and Reinhart, 1994). Several recent studies tried to identify and quantify the factors that caused the food commodity price boom of 2003-08 (FAO, 2008; Vansteenkiste 2009; among others). These studies suggest that growth in demand, which outpaced growth in supply since the 1980s, is a key factor. Other surveys argued that biofuel is the culprit, since it increases demand for staple crops (World Bank 2008; among others). All those studies assumed competitive markets and did not consider the impact of biofuel on energy costs to farmers. Moreover, they ignored OPEC. These studies leave us perplex regarding the true impact of biofuel on food commodity prices – was it or wasn't it an important contributor to the recent food commodity boom. We believe that to answer this question, the interactions between energy and food needs to be correctly modeled. In the process OPEC needs to be introduced, and the impact of biofuels need to be compared to other factors the literature argues are important. 3 This paper aims to analyze the multiple contributions of energy and biofuels to the increase in food prices, within a multi-market framework. We decompose the energy impact on food commodity prices into two factors: the allocation of land to biofuel crops (which reduce food and feed availability and increase aggregate demand of food commodities), and the increase in energy prices (which increase production costs and reduce the supply of food commodities). OPEC affects both. Thus, in the process we introduce a new framework to analyze how OPEC affects energy prices, and how the introduction of alternative energy sources such as biofuel affects choices by OPEC. Moreover, to gain a perspective of biofuel's contributions to the food commodity price boom of 2003-08, we also assess the impact of growth in the demand for food commodities in China and India on food commodity prices. Rajagopal et-al. (2007) showed that the first-generation of biofuels derived mostly from corn …
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