Gas oils: between cost effects and renewable alternatives

In the article Hydrocarbon energy: interconnection between physical and financial markets along the value chain, the relationship between crude oil prices and the prices of the main hydrocarbon derivatives (gasoline, gas oils, and fuel oils) was analyzed. The article highlighted how variations in crude oil prices do not directly translate into price changes for derivative products in the physical market but are mediated through the effects on the corresponding financial prices.
This relationship also holds when considering eco-friendly alternatives. An example is the price of gas oils containing biodiesel.

The chart below shows the price dynamics of gas oils containing biodiesel (based on customs data) and gas oils (biodiesel free) quotations from the Chicago Mercantile Exchange (CME), expressed in euros per ton.

Gas oils prices, in Euros per Ton

As shown in the chart, the two gas oils prices exhibit very similar dynamics and price levels.
In addition to the role of the financial benchmark for gas oils, representing the raw material costs upstream in the supply chain through its link to crude oil prices, another factor to consider in determining the price of this type of gas oils is biodiesel, a renewable alternative to fossil fuels considered more environmentally sustainable.

The role of substitute goods: Biodiesel

Biodiesel is a biofuel produced from vegetable oils such as rapeseed, sunflower, palm, soy, etc. Its price is therefore influenced by the prices of vegetable oils, both crude and waste oils.

In the chart below, biodiesel prices are compared with a crude vegetable oil price index^[1] and customs-based prices for used cooking oil^[2].

Biodiesel Prices and Their Determinants, in Euros per Ton

In the case of biodiesel, its price is closely tied to raw material costs, represented by the prices of the two oils involved in the production process.

Relationship Between Gas oils, Financial Benchmark, and Substitute Goods

The relationship between the price of gas oils containing biodiesel, financial gas oils prices, and biodiesel prices was estimated using the Regressions tool available on PricePedia. Specifically, the Engle-Granger dynamic specification model was used, which allows estimation through two separate equations^[3]:

1. a long-term equation, which accounts for the structural relationship between the variables considered;
2. a short-term equation, which reproduces the dynamic relationship between actual and theoretical values.

In this analysis, the dependent variable is the price of gas oils containing biodiesel, and the determinants are the other two prices.

To provide a graphical representation of the accuracy of the estimated model, the chart below compares the long-term regression fit with the actual prices of gas oils containing biodiesel.

Gas oils containing Biodiesel, comparison between Fit and Actual Price, in Euros per Ton

The estimated series captures the actual price dynamics of the derivative almost perfectly.
From the long-term estimation results, the effect of the CME gas oils price is approximately 0.9: this means that a 10% increase in CME gas oils results in a 9% increase in the dependent variable's price. Conversely, the effect of biodiesel prices on the dependent variable is significant and approximately 0.1.

1. The vegetable oil index is available in the PricePedia Scenario section and is constructed as the average of financial prices for palm oil, soybean oil, and canola oil.
2. The customs price of used cooking oil is derived from customs flows under the CN8 code CN151800.95 (Inedible mixtures or preparations "yellow grease" of animal or of animal and vegetable fats and oils and their fractions). The product will be available on PricePedia with the January 2025 data update.
3. The model estimation results are reported below:

Long-Term Equation Results

Short-Term Equation Results