Biofuel policies and their ripple effects: An analysis of vegetable oil price dynamics and global consumer responses

Abstract

The paper analyzes the price dynamics of Palm, Soybean, Rapeseed, and Sunflower oils due to their extensive uses in the food and fuel sectors and recent considerable price increases. We consider the impact of biofuel policies and consumers’ responses. Using Johansen cointegration and VECM, we identify two long-term equilibrium relationships that arise from biofuel policies as our first key finding. In our second insight, an asymmetric AR-EGARCH-DCC model results show heightened volatility and correlation responses to vegetable oil price deviations, especially post-biofuel. Biofuel policies significantly influence shifts in time-varying correlations among these price shocks. Finally, we examine how household consumers in nine countries respond to price shocks with a structural VAR model. The post-biofuel policy era markedly influenced consumer reactions regarding vegetable oil price fluctuations. While most nations show decreased sentiment with price hikes, China and Germany see increased consumer sentiment. South Africa’s response varies by oil type. Biofuel policies amplify these effects on consumer confidence across all studied countries. These findings have significant implications for policymakers trying to balance the energy transition and global food security while promoting sustainable growth in vegetable oil demand across both sectors and ensuring price stability for global agricultural commodities.