The minimum biofuel requirement and the oil monopolist

The aim of the thesis is to describe how the minimum biofuel requirement affects the monopolistic oil markets. This is an increasingly important questions, because the governments are smoothing the biofuel’s way into the fuel markets for both the economical and environmental reasons. The focus in this thesis is mainly on the minimum biofuel requirement, but at times that policy is compared also to a subsidizing policy. To answer the research question of how the oil markets are affected by the minimum biofuel requirement, the interaction between the oil, fuel and biofuel markets was defined. From that the residual oil demand was derived, which was applied into two different cost structures, a static and a dynamic one. Solving these two cases both analytically and numerically reveals their price and quantity paths for oil, fuel and biofuel as well as the oil stock’s path. The final step of the analysis was to derive how changing the minimum biofuel requirement affects these paths. The resulting contributions from this thesis are theoretical and methodological. Numerical results are not given as no real, empirical demands, supplies and costs were used. The first contribution relates to defining the residual oil demand in case of the minimum biofuel requirement and taking time aspect into account, which forces the minimum biofuel requirement break at a certain production levels at a certain time instant. The second contribution relates to handling the production path when a monopolist faces a substitute, and that affects the price and quantity paths. Solving these paths with the static and the dynamic cost structures and analyzing the changing biofuel requirements on them is the third contribution. The final contribution of this thesis relates to presenting a subsidized biofuel case, and showing that contrary to some results in literature, the biofuel subsidy does not neccessarily postpone the oil exhaustion in linear demands.