Comparing Price Transmissions between a High Blend Ethanol Fuel and a Conventional Fuel: An Application of Seemingly Unrelated Regressions

Abstract

This study compares how crude oil and ethanol price changes are passed through to the wholesale prices of a conventional fuel (E10), which contains 10% ethanol, and a high-blend ethanol fuel (E85), which contains 51% to 83% ethanol. Daily observations from October 2017 to June 2019 were obtained from a large market in the United States that provided wholesale fuel prices and ethanol prices. The Error Correction Model (ECM) was applied to each fuel specification using Seemingly Unrelated Regressions (SURs) in order to improve the efficiency of the estimates. Comparable to prior research, the long-run pass-through coefficient for E10 with respect to crude oil was 1.13. In contrast, the E85 long-run pass-through coefficient with respect to crude oil was 0.74. Estimates for the short-run analysis indicated asymmetry in the transmission of crude oil price changes to E10, with crude price increases passing through at greater rates compared to crude price decreases. Symmetry was found in the transmission of ethanol price changes to E85, indicating the same response to rising and falling ethanol costs. Despite the differences in ethanol requirements, the relative prices of crude oil and ethanol are still important for both fuels.