Supply and demand of biofuels in the fuel market of Thailand: Two stage least square and three

least square approaches

abstract
In recent years, Thailand Government has made ambitious targets for biofuels and the demand
for biofuels has increased. This study estimates the long-term factors that affect the supply and
demand for biofuels (bioethanol and biodiesel) in Thailand by developing a theoretical model
based on simultaneous equations, using Two stage least square and Three stage least square
approaches. Quarterly data were collected for the years 2007 e 2013:2. Amongst many factors,
we found three major factors affecting the long-term demand for biofuels: the price of biofuels,
the real gross domestic product and the number of vehicles. On the other hand, the long-run
supply of biodiesel and bioethanol was influenced by the gross domestic product, the cost of
substitution using biofuel (i.e., price of gasoline 95 compared to blended gasoline) and the price
of biodiesel. These findings have important policy implications to the government plans for
biofuel development, suggesting that maintaining the price difference between gasoline and
gasohol (blended gasoline) and a greater penetration of biofuel vehicles in fleet would be
important policies for biofuel consumption. On biofuel supply side, results indicate that policies
to compensate the biofuel producers for prices and reducing cost of bio-fuel production are
important.

Keywords:
Biofuels demand
Biofuels supply
Two stage least square (2SLS)
Three stage least square (3SLS)

Introduction
Energy crises have been observed in many countries over the past decade due to higher
demand and prices of energy. Global rise in crude oil prices and environmental concerns drove
the Thai government to institute the national development plan in the past. The Renewable and
Alternative Energy Development Plan of Thailand (AEDP) calls for 25% of the country's energy
to be produced from renewable resources by 2021. The plan, entitled as AEDP 2012e2021, is
aimed of using alternative energies such as solar and wind energy, aswell as using biodiesel and
bioethanol [1]. One of the key aspects of AEDP is to replace imported oil and increase the
energy security of the country [2]. According to the plan, Thailand will replace imported oil by
44% with biofuel and encourage ethanol and biodiesel (B100) consumption to reach nine and six
million liters per day respectively by 2021. Governmental policies promoting biofuels during the
years 2005e2010, resulted in a more than 10-fold increased production of bioethanol and
biodiesel. The country's share of biofuel production in the Asia- Pacific region increased from
6% in 2005 to19% in 2009 [3]. Nevertheless, the government's target for biofuel consumption
has not been achieved despite the presence of subsidy and taxation policies to raise biofuels
demand [4].
Energy demand management is becoming an important issues since the future world is
dependent on today's decision. Managing the energy resources in an optimal manner has become
imperative among energy planner and policy makers [5]. However, lack of sufficient and reliable
historical data of biofuel especially in developing countries is one of the main challenges in
developing accurate forecasting models [5]. In the context of biofuel management, it is necessary
to understand the major factors (e.g. socioeconomic, demographic factors) that affect biofuel
production and consumption and how they affect the biofuel demand and
supply.
Suganthi and Samuel [4] reviewed energy forecasting models and divided them into
twelve categories namely, time series models, regression models, econometric models,
decomposition models, unit root test and integration models, ARIMA models, expert systems
and ANN models, grey models, input-output models, genetic algorithm/fuzzy logic/neuro fuzzy,
integrated model and bottom up models. Jebaraj and Iniyan [5] also reviewed models for
forecasting energy quantities into six categories of energy planning models, energy supply-
demand models, forecasting models, Optimization models, energy models based on neural
networks and emission reduction models. Among these models, regression analysis was widely
used to forecast biomass and bioenergy consumption because of mature theory and simply
algorithms [6]. However, limitations of regression analysis is that it requires large sets of data for
forecasting [7]. The Artificial neural network (ANNs) also widely chosen as the energy
forecasting tool such as industrial sector [8], residential sector [9] and transport sector [10].
ANNs can forecast the future values of many variables simultaneously and nonlinear relation in
the data structure [8] but cannot find out the coefficient of each independent variables [11].
Simultaneous equations, especially two stage least square (2SLS) and three stage least
square (3SLS), have been developed as a less complex models that require minimal data and are
effective in long term forecasting. The application of 2SLS and 3SLS solves the problem of
heteroscedasticity, multicollinearity [12], autocorrelation [13] and endogeneity of price and
quantity of goods [14]. The results form 2SLS and 3SLS are more accurate than time series [15]
and ordinary least square (OLS) [12]. Simultaneous equations are two-way relationship between
y and (some of) the x's. This relationship makes the distinction between the dependent and
explanatory variables of dubious value [16]. Generally, simultaneous equations are composed of
2 x's and y equations. Each simultaneous equation is used for expressing the mutually or jointly,
dependent or endogenous variables. Unlike the single equation model, simultaneous equation
models take into account information provided by other equations in the system [17]. Two stage
least square is a method of extending regression to cover models which violate ordinary least
square (OLS) assumption of exogeneity so that the disturbance term of the dependent variable is
correlated with the cause(s) of the independent variable(s) [18]. Three stage least square is a
combination of multivariate regression (SUR estimation) and two stage least square. It obtains
estimated instrumental variable, taking into account the covariances across equation disturbances
as well [19]. The objective function for three stage least square is the sum of squared
transformed fitted residuals [20]. The system equations estimated by 2SLS and 3SLS, are more
efficient to capture the interrelation between equations and causal and feedback effect between
the core variables of the system [17].
Although a number of studies have been conducted to estimate biofuels demand and
supply (i.e. demand and supply for ethanol in U.S. [14,21], ethanol demand in Brazil [22,23],
energy demand in EU [24,25], energy demand in Turkey [26] and African countries [27,28]),
only a few studies have specifically examined biofuel demand in Thailand e.g. Limanong et al.
[6]. Previous studies employed different methods for forecasting the supply and demand of bio
fuels such as regression, panel data, trend analysis, time series analysis, simultaneous equation
(OLS, 2SLS and 3SLS). From literature reviews, only few studies compared demand and supply
models by using simultaneous equation such as OLS compared with 2SLS [29] and OLS
compared with 3SLS [30].
 The literature reviews found that the key factors which affect demand of biofuels are
GDP [23], number of vehicle [21], biofuel price [21,29], and previous year biofuel price [23].
None of past literature attempted to identify five groups of factors (i.e. socioeconomic factors,
cost and substitution factors, lagged value of the dependent variable, information factors and
environment factors). In fact, Limanong et al. [6] developed the demand for gasohol (91 and 95)
in Thailand (focus on Bangkok and Nakhon Ratchasima) by using quarterly data from 2005 to
2008 and analyzed by OLS. In terms of factors, this study is using three groups of factors such as
socio-economic factors (i.e. GDP, population, number of vehicle and number of gas station), cost
and substitution factors (i.e. gasoline price) and information factors (i.e. government subsidizes).
Therefore, to fill this important knowledge gap in the literature, this study has two main
key objectives. First, this study attempts to identify, quantify and select the suitable factors
affecting biodiesel and bioethanol in Thailand using quarterly data from 2007 to 2013:2 which
are the most update data. Secondly, this study also develops the long run supply and demand
alternative models (i.e. 2SLS and 3SLS) for biodiesel and bioethanol in Thailand with four group
of factors (i.e. socio-economic factors, cost and substitution factors, lagged value of the
dependent variable and information factors) and selects the most accurate one to forecast biofuel.
This study used 2SLS and 3SLS for more accuracy compared to other models and it is ideal to
the model under limitation of data. Finally, we compared the best fit model with ANNs to show
the robustness of the results. This study aims to reflect on those factors which come up with
useful policy messages for biofuel development in Thailand.
This paper is organized into five sections. Section 2 provides concise literature review on
demand and supply of biofuels. The methodology used in this analysis including data collection
and model analysis is presented in Section 3. The empirical findings from these two modelling
approaches are presented in Section 4. Finally, Section 5 presents discussions, conclusions and
policy implications.

2. Literature review
The most important influencing factors identified in previous studies that affect biofuel
demand and supply as summarized in Table 1. According to Limanong et al. [6], and 26
literature review, these factors can be categorized into five groups such as socioeconomic
factors, cost and substitution factors, lagged value of the dependent variable, information factors
and environment factors as described below.
Socio-economic factors consist of population, gross domestic product (GDP),
income/income per capita, technology, number of vehicles and number of station. Among these
factors GDP, income and number of vehicles are the most widely used and significant factors in
biofuel forecasting, followed by population and number of stations, respectively.
Cost and substitution factors include the cost of biofuel and substitution of biofuel
products that affect the decision choices of what modes or which type of biofuel to be used.
These factors comprise of price of biofuel, gasoline, diesel, crude oil and natural gas, as well as
feedstock price and substitution feedstock price. Biofuel price and gasoline/diesel price are
significant factors in biofuel forecasting.
The lagged variable is a crucial factor to examine the long-term effect on various aspects
of travel demand or biofuel consumption with the consideration that the external factor is
dynamic, and the effect could gradually change. Biofuel price in previous year is also significant
factor in biofuel forecasting.
The fourth group includes other important information that is unique to issue of interest
such as government campaign and seasonal dummy variable. Environment factors is the last
group which is usually found in biofuel demand and supply forecasting. The main factors are
CO2 emission and CO2 emission per capita.
We considered variables commonly used in previous studies to forecast biofuel demand
and supply. For demand function, four groups of factors considered are socio-economic factors
(i.e. real GDP, employment, number of vehicles and number of biofuel stations), cost and
substitution factors (i.e. price of oil product and price of biofuel), lagged of the dependent
variable (i.e. price of feedstock in previous year) and information factors (i.e. campaign for
compensation),. Whereas environment factors were not included in the model because of the
insufficient amount of data.

3. Methodology
In order to analyze the factors affecting long-run biofuel demand and supply, a set of
methodologies were implemented that had been widely used in time-series forecasting.
Simultaneous equations were used and analyzed by 2SLS and 3SLS methods and results were
compared with Artificial Neural Networks (ANNs).

3.1. Simultaneous equation models (SEMs)

SEMs use two kinds of variables in the models, namely exogenous variables and
endogenous variables. Endogenous Variables are variables determined within the system of
equations which represent the true world [16,41,42], and are functions of other variables present
in the system. Exogenous Variables are variables determined outside the system. As a general
rule, when a variable is endogenous, it will be correlated with the disturbance term.
TType equation here.his makes endogenous variables, violate the Gauss Markov (GM)
assumptions and make OLS estimates biased [42]. This fact can be seen in the equations (1) and
(2), representing two equations where, Y and X1 are both endogenous.

3.1.1. Two stage least squares (2SLS)

Two-Stage least squares (2SLS) regression analysis [16,41,42] is a statistical technique
that is used in the analysis of structural equations. It is an extension of the OLS method and it is
used when the dependent variable's error terms are correlated with the independent variables
[16,42]. This technique useful when there are feedback loops in the model and the method is
called “two-stage” because it conducts estimation in two steps;
Step 1: Regress 𝑌−𝑖 on X and obtain the predicted values 𝑌̂ −𝑖
Step 2: Estimate 𝛾𝑖 , 𝛽𝑖 by the ordinary least squares regression of 𝑦𝑖 on 𝑌̂ −𝑖 and 𝑋𝑖
If the ith equation in the model is written as

Where 𝑃 = 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ is the projection matrix onto the linear space spanned by the exogenous
regressors X. The estimated Rsquare from the reduced form of equations gives some idea of the
adequacy of the instrument.
3.1.2. Three stage least square
Three stage least square method combines two-stage least squares (2SLS) with seemingly
unrelated regressions (SUR) [16,41]. SUR is a generalization of a linear regression model that
consists of several regression equations. Each equation has its own dependent variable and
potentially different sets of exogenous explanatory variables. Each equation is a valid linear
regression on its own and can be estimated separately. The model can be estimated equation by-
equation using standard ordinary least squares (OLS). Such estimates are consistent, however
generally not as efficient as the SUR method, to feasible generalized least squares with a specific
form of the variance-covariance matrix. Two important cases when SUR is in fact equivalent to
OLS, are: either when the error terms are in fact not correlated between the equations (so that
they are truly unrelated), or when each equation contains exactly the same set of regressors on
the right-hand-side [16].

3.2. Developing the alternative model

This study employed a double log model as it was useful in providing the regression
coefficients for the direct estimation of elasticity. The model focuses on long-run factors either
affecting or being able to change long term supply and demand of biodiesel and bioethanol. The
details of each approach are given as follows.

3.2.1. Ethanol demand model

In course of determining the factors, we considered various factors based on the previous
literature and tested for correlation and reduced number of factors which are described in Section
4. There are five long-run factors, which significantly affected the demand of bioethanol. The
five long run factors are price of gasoline95, gasohol1 95 (mixture 90% gasoline 95 and 10%
ethanol) and number of vehicles, bioethanol stations, and real GDP. These are represented in
(Eq. (5) and (6)).
Demand : Qd bioethanol = f (P gasoline 95; P gasohol 95; # vehicles; # gasohol stations; real
GDP) (5)
P gasohol 95 = f (Qd bioethanol; P gasohol 95 lag 4 quarter; P cassava; P sugar cane) (6)
 The exogenous variables in Eq. (5) are the price of gasoline (P gasoline), number of
vehicles (# vehicles), number of gasohol stations (# gasohol station) and real GDP, while price of
gasohol (P gasohol 95) and demand quantity of bioethanol (Qd bioethanol) were always treated
as endogenous (Eq. (5) and (6)). Additionally, the price of gasohol is treated first as exogenous
in the model (5) and then as endogenous as shown in (Eq. (6)).
When the price of gasohol 95 is treated as endogenous, price of gasohol 95 in previous
year and price of cassava and sugar cane are also exogenous variables in the system of (Eg.(6)).
Moreover, real GDP and GDP per capita were used as exogenous variables in some systems of
equation (2). Some of those equations used only the price of gasohol 95 in previous year as an
exogenous variable in the system of (Eq. (6)).
The bioethanol demand function in double-log form for two stages least square (2SLS)
and three stages least square (3SLS) can thus be written as:

ln 𝑄 𝑑 𝑏𝑖𝑜𝑒𝑡ℎ𝑎𝑛𝑜𝑙𝑖𝑡 = 𝛽0 + 𝛽1 ln 𝑃 𝑔𝑎𝑠𝑜𝑙𝑖𝑛𝑒 95𝑖𝑡 + 𝛽2 ln 𝑃 𝑔𝑎𝑠𝑜ℎ𝑜𝑙 95𝑖𝑡 + 𝛽3 ln 𝑣𝑒𝑖𝑡 +

𝛽4 ln 𝑠𝑡𝑎𝑖𝑡 + 𝛽5 ln 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃𝑖𝑡 + 𝑒 (7)

where Qd bioethanol is the demand quantity for bioethanol for all sectors in Thailand during
quarter i and year t. It is measured in millions of liters. The variable, P gasoline is the gasoline 95
retail price in the Bangkok market (Baht per liter), P gasohol is the gasohol 95 retail price in
Bangkok market (Baht per liter). The variable, ve is number of gasoline engine vehicle in
Thailand, sta is the number of gasohol station in Thailand, and real GDP is real gross domestic
product of Thailand (millions of Baht) (Eq. (7)). P cassava is the price of cassava, (Baht/kg). P
sugar cane is price of sugar cane (Baht/kg), and GDP per capita is real gross domestic product
per capita of Thailand (Baht). These are used as exogenous variables in some equations. The
signs for 𝛽2, 𝛽3, 𝛽4 and 𝛽5 were expected to be positive, while the sign for 𝛽1 was expected to be
negative.

3.2.2. Ethanol supply model

Similar to ethanol demand model, we considered various factors based on the previous
literature and selected for correlation. There were five long term significant factors affecting
demand for bioethanol in this study. These factors included the price of gasoline 95, price of
gasohol 95, level of employment, real GDP and compensation as shown in (Eq. (8))

Supply : Qs bioethanol = f(P gasoline 95; P gasohol 95; labor employment; real GDP;
compensation)
(8)

P gasohol 95 = f(Qs bioethanol; P gasohol 95 lag 4 quarter; P cassava; P sugar cane)

(9)

The exogenous variables in these equations were the price of gasoline 95 (P gasoline 95),
number of persons employed (# labor employment), real GDP and compensation. The price of
gasohol 95 (P gasohol 95) and supply quantity of bioethanol (Qs bioethanol) were always treated
as endogenous (Eq. (8) and (9)). Meanwhile, price of gasohol were first treated as exogenous to
the model and then as endogenous. If the price of gasohol 95 was treated as endogenous,
exogenous variables in the system of equation (9) would be the price of gasohol 95 in the
previous year, the price of cassava, and the price of sugar cane. Thus, the bioethanol supply
function in double-log form for two stage least square (2SLS) and three stage least square
(3SLS) can be expressed as:
ln 𝑄 𝑠 𝑏𝑖𝑜𝑒𝑡ℎ𝑎𝑛𝑜𝑙𝑖𝑡
= 𝛽0
+ 𝛽1 ln 𝑃 𝑔𝑎𝑠𝑜𝑙𝑖𝑛𝑒 95𝑖𝑡
+ 𝛽2 ln 𝑃 𝑔𝑎𝑠𝑜ℎ𝑜𝑙 95𝑖𝑡 + 𝛽3 ln 𝑙𝑎𝑏𝑜𝑟𝑖𝑡 + 𝛽4 ln 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃𝑖𝑡
+ 𝛽5 ln 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛𝑖𝑡 + 𝑒
(10)
𝛽2 , 𝛽3 dan 𝛽4
where Qs bioethanol is the supply quantity of bioethanol for all sectors in Thailand during quarter
i and year t (millions of liters), P gasoline 95 is the retail price of gasoline 95 in the Bangkok
market (Baht per liter), P gasohol 95 is the retail price of gasohol 95 in the Bangkok market
(Baht per liter), labor is all of labor employment in Thailand (thousands of persons), real GDP is
real gross domestic product in Thailand (millions of Baht), and compensation is the value which
the government subsidizes the product (Baht per liter). Moreover, P cassava is the price of
cassava (Baht per kilogram), and P sugar cane is price of sugar cane (Baht per kilogram). The
signs for 𝛽1 , 𝛽3 , 𝛽4 𝑑𝑎𝑛 𝛽5 were expected to be positive, while the sign for 𝛽2 was expected to be
negative.

3.2.3. Biodiesel demand model

There were four significant long-run factors that affected the demand for biodiesel in the
current study. These were the price of biodiesel (mixture biodiesel B100 2e5% and diesel
95e98%), number of vehicles, number of biodiesel stations and real GDP. Mathematically, the
model is shown as (Eq. (11)) below.

Demand : Qd biodiesel it = f ( P biodiesel; # vehicles; # biodiesel station; real GDP )

(11)

P biodiesel = f ( Qd biodiesel; P biodiesel lag 4 quarter; )

(12)

The exogenous variables in these equations were the number of vehicles (# vehicles),
number of biodiesel stations (# biodiesel station) and real GDP. The price of biodiesel (P
biodiesel) and demand quantity of biodiesel (Qd biodiesel) were always treated as endogenous
variables (Eq. (11) and (12)). The price of biodiesel was treated first as an exogenous variable in
the model (11) and then as an endogenous variable as shown in (Eq. (12)). If price of biodiesel
was treated as an endogenous variable, the price of biodiesel in previous four quarters was used
as an exogenous variable in the system as shown in (Eq. (12)). The biodiesel demand function in
double-log form of two stage least square (2SLS) and three stages least square (3SLS) can thus
be written as:

ln Qd biodiesel it = 𝛽0 + 𝛽1 ln P biodiesel it + 𝛽2 ln ve it + 𝛽3 ln sta it + 𝛽4 ln real GDP it + e

(13)
where Qd biodiesel is the demand quantity for biodiesel by all sectors in Thailand at quarter i and
year t (millions of liters), P biodiesel is the biodiesel retail price in the Bangkok market (Baht per
liter), ve is number of diesel engine vehicles in Thailand, sta is the number of biodiesel stations
in Thailand, and real GDP is real gross domestic product in Thailand (millions of Baht). The
signs of 𝛽2 , 𝛽3 dan 𝛽4 were expected to be positive, while the sign for 𝛽1 was expected to be
negative(Eq. (13)).

3.2.4. Biodiesel supply model

There were four significant long term factors affecting supply of bioethanol in the current
study. They were the price of biodiesel, level of employment, real GDP and compensation. This
is seen in (Eq. (14)).

Supply : Qs biodiesel = f ( P biodiesel; # labor employment; real GDP; compensation )

(14)

P biodiesel = f ( Qd biodiesel; P biodiesel B100; P palm oil )

(15)

The exogenous variables in these equations were level of employment (#labor

employment), real GDP and compensation. Endogenous variables were the price of biodiesel (P
biodiesel) and supplies quantity of biodiesel (Qs biodiesel). The price of biodiesel was first
treated as an exogenous variable in the model and then as an endogenous variable. When the
price of biodiesel was treated as an endogenous variable, the prices of biodiesel B100 (100%
biodiesel) and palm oil were also used as exogenous variables in (Eq. (15)). Moreover, only the
price of biodiesel B100 was used as an exogenous instrument in some equations. The biodiesel
supply function in double-log form of two stage least square (2SLS) and three stage least square
(3SLS) can thus be written as:
where Qs biodiesel is the supplied quantity of biodiesel for sectors in Thailand at quarter i and
year t (millions of liters), P biodiesel is the biodiesel retail price in the Bangkok market (Baht per
liter), labor is level employment in Thailand (thousands of persons), real GDP is real gross
domestic product in Thailand (millions of Baht), and compensation is the value government
subsidies (Baht per liter) (Eq. (16)). Moreover, P palm and real GDP were used as exogenous
variables in some equations. The signs of 𝛽1 , 𝛽2 , 𝛽3 dan 𝛽4 were expected to be positive.

3.3. Data collection

The data used in the empirical analysis was comprised of quarterly data from January
2007 to June 2013. Additionally, the quarterly ethanol production and price data were examined
using supply and demand models employing the variables of gasoline price, number of registered
gasoline engine vehicles, number of gasohol stations, real GDP, GDP per capita, cassava price,
sugarcane price, number of people employed and compensation (government fuel subsidies).
Concurrently, the quarterly biodiesel production and price data were examined using supply and
demand models with diesel price, number of registered diesel engine vehicles, number of
biodiesel stations, real GDP, GDP per capita, palm oil price, biodiesel (B100) price, level of
employment and compensation as input variables. The data used in this study were obtained
from publications of various government and national organization. Demand quantity for
bioethanol and biodiesel, supply of bioethanol and biodiesel were obtained from information of
the Department of Alternative Energy Development and Efficiency, Ministry of Energy [43e46].
Gasoline price, gasohol price, diesel price, biodiesel price, price of biodiesel and compensation
data were accessed from Bureau of Petroleum and Petrochemical Policy, Energy Policy and
Planning Office, Ministry of Energy [47e51]. Real GDP and GDP per capita data are taken from
Office of the National Economic and Social Development Board [52]. The data of number of
gasoline and diesel engines was published by the Transport Statistic Sub-division, Planning
Division, Department of Land Transport, Ministry of Transport [53,54]. The number of gasohol
and biodiesel stations was published by Bureau of Fuel Trade and Stockpile, Department of
Energy Business, Ministry of Energy [55,56]. The prices of cassava, sugar cane and oil palm
were obtained from the Office of Agricultural Economics, Ministry of Agriculture and
Cooperatives [57e59]. Labor employment datawas taken from the Bank of Thailand [60].
Population datawas obtained from Institute for population and social research, Mahidol
University [61]. Prior to performing any regression analysis, descriptive statistics were generated
for each of the dependent and independent variables as shown in Table 2.

This analysis starts with the unit root tests, bioethanol demand function, bioethanol
supply function, biodiesel demand function, and biodiesel supply function.

4.1. Unit root tests

The unit root tests used in this section is the Augmented Dickeye Fuller tests (ADF). The
ADF tests with a constant and trend are applied to the level and first differences series to check
for the presence of unit roots. Table 3 reports that the null hypothesis of a unit root cannot be
rejected at 5% in most cases. Even though demand quantity of bioethanol (million liter) was
accepted at 5% of level and first differences but it rejected in second differences at 5%.

4.2. Modelling the long-run bioethanol demand

Table 4 presents the long-run relationship between bioethanol consumption and the
determining factors including the price of gasoline, price of gasohol, number of vehicles, number
of bioethanol stations, and real GDP. The results of ethanol demand function were 8 models, A-1
to A-8. Model A-1 to A-4 applied the 3SLS approach, while model A-5 to A-8 applied the 2SLS
approach. In all cases, the best fitting equation in 3SLS estimation was obtained from Model A-4
with Adj. R2 = 0.731 (R2 = 0.777), S.E = 0.134, and DW = 1.207 (indicating the absence of
serial correlation). While, the best fitting equation in case of 2SLS estimation was obtained with
model A-6 with Adj. R2 = 0.815 (R2 = 0.837), S.E. = 0.159, and DW = 0.898 (indicating the
absence of serial correlation). Model A-4 was the best model, it used four input variables (the
price of gasoline 95, price of gasohol 95, number of vehicles, and real GDP with a 2 quarter lag)
to predict bioethanol demand. These variables were found to be significant, stable, robust and
had the expected signs. It used real GDP with a quarter lag. The model was found to be elastic.
The price of gasoline 95 had an elasticity of 3.158, while elasticity of the price of gasohol was -
2.274. Additionally, the coefficient for number of vehicleswas 1.906, and the coefficient of real
GDP with a 2 lag was - 1.463. This shows the elasticity of changing the number of vehicles upon
the change in bioethanol demand.
 This elasticity may explain in the direct effect upon bioethanol demand. When holding
other factors constant, increasing the price of gasoline 95 by 1 Baht per liter will lead to increase
in consumption of bioethanol by 3.158 million liters. Similarly, decreasing the price of gasoline
95 by 1 Baht per liter will lead to a decrease in consumption of bioethanol by 3.158 million
liters. Similarly, increasing the price of gasohol 95 by 1 Baht per liter will lead to a decrease in
bioethanol consumption of 2.274 million liters. Decreasing the price of gasohol 95 by one Baht
per liter will result in an increase in bioethanol consumption of 2.274 million liters. Obviously,
the number of vehicles showed a positive effect upon bioethanol consumption. Increasing the
number of vehicles by one unit will lead to increase in consumption of bioethanol by 1.906 L.
These results follow the demand law but are contrary to expectation because the elasticity of real
GDP with a 2 quarter lag was negative (-1.463). A previous study also showed the similar
expected signs and value of elasticity [6,62]. It showed that the price of gasoline and number of
vehicles were positive signs on demand for bioethanol whereas price of gasohol was negative
signs. Another research study [21] also showed the price of gasoline had strongest effect to
bioethanol demand.
When the real GDP increases in a period, consumption will increase in the next 2
quarters. The negative real GDP elasticity may imply growth of real GDP. Consequently,
consumption of bioethanol in Thailand will be less than that of gasohol 95 indicating that
demand of gasoline 95 has increased. Hence, gasoline 95 is reasonably substituted by gasohol 95
with its lower price. These results also show that gasohol 95 is better than gasoline 95 in being
the representative of inferior goods. However, consumption of gasoline and gasohol accounted
for only 17% of total consumption of petroleum products in Thailand during 2012e2013 [63]. An
increase of GDP does not affect the demand for gasohol immediately. Its effect will be felt in the
next 2 quarters. This is because households are the major consumer of gasohol. An increase in
GDP does not significantly affect disposable income.
Some dependent variables affecting bioethanol demand had high correlation. For
example, the price of gasoline 91 was highly correlated with the price of gasoline 95, the price of
gasohol 91(mixture 90% gasoline 91 and 10% ethanol), and the price of gasohol 95. Similarly,
the number of bioethanol stations had high correlation with number of vehicles. The Thai
government stopped production of gasoline 91. Thus, we removed some ineffective variables
that had low correlation from the model such as the price of gasoline 91, price of gasohol 91, and
number of bioethanol stations.

4.3. Modelling the long-run bioethanol supply

The results of estimations of Thailand's bioethanol supply are shown in Table 5. The
determining factors included price of gasoline, price of gasohol, level of employment, real GDP
and compensation. Therewere four potential ethanol supplymodels, B- 1 to B-4. B-1 and B2 used
the 3SLS approach, while B-3 and B-4 employed the 2SLS approach. The best fitting bioethanol
supply 3SLS estimation was obtained from Model B-2. It had an Adj. R2 = 0.836 (R2 = 0.862),
S.E. = 0.187, and DW =1.532. This indicated the absence of serial correlation. The best fitting
2SLS estimation was obtained from Model B-3. It had an Adj. R2 = 0.848 (R2 = 0.872), S.E. =
0.180, and DW = 1.540. The most important variable was found to have significance, stability,
robustness and presence of the expected signs. Meanwhile, the best model was Model B-3
allowing for two factors to influence bioethanol supply, i.e., the price of gasoline 95 and real
GDP. The equation explained 87% of the variation in the dependent variable whereas 13% was
depend on other variables which exclude the equation. The model estimated the elasticity of the
price of gasoline 95 as 2.140 and the elasticity of real GDP was positive with an elasticity value
of 2.910. This elasticity suggests that increase in price of gasoline 95 and real GDP have a very
strong effect on quantity of supply. The positive relationship between real GDP and ethanol
supply is supported by previous studies [64,65].
The results show that the price of gasohol 95 does not affect the supply of gasohol. In
contrast, the price of gasoline 95 has a considerable effect on the supply of gasohol. This is
because gasohol was an inferior good compared to gasoline when price of gasoline increased. An
increase in the price of gasoline 95 leads to increased gasohol consumption and bioethanol
production. Level of employment was not significant because half of the labor used public
transportation. Thus increasing employment did not directly affect the demand for bioethanol.
Compensationwas not significant on the supply side because in 2010e2011, the Thai government
subsidized the price of gasoline so that it was nearly the price of gasohol. The total value of fuel
subsidies was 3000 million Baht [63]. Additionally, the prices of gasoline 91, gasohol 91, and
gasohol 95 had high correlations. Thus, it was possible to remove some variables from the model
which did not pose impact on the model and had low correlation such as the prices of gasoline 91
and gasohol 91.

438 A. Chanthawong et al. / Energy 114 (2016) 431e443

Table 2
Summary of statistical analysis of biofuel fuel markets in Thailand (Quarterly 2006e2013:2)
4.4. Modelling the long-run biodiesel demand
The long-run estimation of biodiesel demand showed relationship between biodiesel
consumption and determining factors including the price of biodiesel, number of vehicles,
number of biodiesel stations and real GDP. Table 6 summarizes the parameters in the long-run
estimation. Two models were developed, C-1 and C-2. C-1 used a 3SLS approach, while C-2
used a 2SLS approach.
The 3SLS equation obtained from Model C-1 had an Adj. R2 = 0.872 (R2 = 0.896), S.E. =
0.111 and DW = 1.838, which indicated the absence of serial correlation. The 2SLS estimation
from Model C-2 had an Adj. R2 = 0.872 (R2 = 0.896), S.E. = 0.111, and DW = 1.838 which
indicated the absence of serial correlation. The most important variable to have significant effect
were stability, robustness and presence of the expected signs. Model C-1 and C-2 had the same
elasticity, R2 and adj. R2, but the t-test statistic for each factor was different. The elasticity of
price of biodiesel with a lag of 3 quarters was a positive value of 0.5881, while the elasticity of
number of vehicles with a lag 4 of quarters and real GDP with a lag of 4 quarters were 0.588 and
1.807, respectively. The number of biodiesel stations was not significant.
This elasticity suggests that there is a direct effects on biodiesel demand. This mean, an
increase in the price of biodiesel of 1 Baht per liter 3 quarters earlier will lead to increase
biodiesel consumption by 0.5881 million liters. The number of vehicles had positive effect to
biodiesel consumption, as a result, an increase in biodiesel consumption of 2.134 million liters
resulted from increase in the number of vehicles. The real GDP of 4 quarter earlier had a positive
effect to biodiesel consumption. Biodiesel consumption increases 1.807 million liters because the
GDP 4 quarters earlier increased by 1 million Baht. This positive price elasticity of biodiesel
shows the effect of Thailand's promotion of biofuels in many
of its policies. One of the most important policies was to subsidize biodiesel market price so as to
keep it lower than 30 Baht per liter. Biodiesel contribute 46% of total petroleum product
consumption in 2012 [63]. When the price of biodiesel increases, it tends to increase
consumption after 3 quarters. Moreover, increase in number of vehicles and GDP per capita
during this period affects the demand of biodiesel after 3 and 4 quarters, respectively. The main
reason is that biodiesel is used in some sectors which do not tend to increase GDP directly such
as agriculture and transportation. A previous study also showed that an increase in GDP does not
affect biodiesel demand immediately and the impact of GDP on the renewable energy
consumption is significant for the countries [36,66]. Another study [6] also shows the biodiesel
demand regarding lags in the price of biodiesel. The dependent variables affecting biodiesel
demand had significantly high correlation such as number of biodiesel stations and vehicles.

4.5. Modelling the long-run biodiesel supply

The estimations from modelling of Thailand's biodiesel supply are shown in Table 7. The
determining factors included the price of biodiesel, level of employment, real GDP and
compensation. The ethanol demand function feasibility results lead to the development of 8
models, D-1 to D-8. Model D-1 to D-4 used a 3SLS approach, while model D-5 to D-8 used a
2SLS approach. The best fitting equation in the case of 3SLS estimation was obtained from
model D-4 with an Adj. R2 = 0.587 (R2 = 0.653), S.E. = 0.690, and DW = 1.079, indicating the
absence of serial correlation. The best fitting equation in the case of 2SLS estimation was
obtained from Model D-7 with an Adj. R2 = 0.581 (R2 = 0.648), S.E. = 0.694, and DW = 1.093,
indicating the absence of serial correlation. This variable was found to have significance,
stability, robustness and the expected sign. The best model estimate obtained from Model D-7
used four factors that affected biodiesel. These included biodiesel price, level of employment,
real GDP, and compensation. These variables met the selection criteria, the elasticity of biodiesel
price was 3.895, while elasticity of level of employment was 12.865. In cases of real GDP and
compensation, elasticity was 6.648 and 0.765, respectively. The equation explained 65% of the
variation in the dependent variable whereas 35% was depend on other variable which exclude the
equation such as consumer behavior and political situation.
These results suggest that the supply of biodiesel is least sensitive to compensation
whereas, the number of employment has
very strong effects. The main reason for this is that the average growth rate of employment in
this period was highest (around 0.42) than other variable, while, the average growth rate of
compensation and real GDP were 0.07 and 0.18, respectively.

4.6. Comparison of results from 2SLS, 3SLS with ANNs

This section compares the results of the best fit model that was achieved in this study
from 2SLS and 3SLS (section 4.2e4.5) analysis with ANNs. For ANNs analysis, this study
follows methods by Geem [10] and Kialashaki and Reisel [8] for forecasting demand and supply
of biodiesel and bioethanol. The results found that two models are not different in terms of R-
square as shown in Table 8. However, the results obtained from 2SLS and 3SLS can explain the
relationship and importance between dependent and independent variables and coefficient value.
The results imply that increasing GDP, price of biofuel and substitution cost would lead
to raise the demand and supply of biofuels in Thailand. In the future, after lunch of ASEAN
Economic Community (AEC) in 2016, biofuels are expected to freely trade in SE Asia. Import
tax for ethanol is expected to be scrapped due to AEC agreement and ethanol can freely flow in
the region from Vietnam and Thailand to Philippines. Although, Thailand is potential exporter in
SE Asia, in the future, Thailand may only be able to serve ethanol to the domestic market
because of aggressive domestic government policy which has already been seen in forced
blending 10% ethanol to gasoline 91 and expected further supporting of the infrastructure for E
20 and E 85 [67]. For biodiesel, two big exporters have excess supply of biodiesel (Malaysia and
Indonesia). Thailand is expected to increase biodiesel demand in the future due to 7% biodiesel
blending policy which is yet not implemented due to lack of feedstock. Although, Thailand's
demand for biodiesel is rising, the government is expected to protect domestic producer through
various mechanisms because the cost of production of palm oil in Thailand is higher than
Malaysia and Indonesia [67,68]. Meanwhile, Philippines is an important market because of
government blending policy but lack of domestic production [67].

5. Conclusion and policy implication

Thailand has emerged as a key country for biofuel markets in recent years, including
being one of the world's top ten ethanol exporters. However, biodiesel has been held back due to
lack of
growth in feedstock production. This research attempted to outline the factors affecting the
supply and demand for biofuels in Thailand to aid its future development. Differences were
found in the factors driving supply and demand of biofuels. The factors affecting the demand of
bioethanol were price of gasoline 95, price of gasohol 95, number of registered vehicles and real
GDP 2 quarters earlier with elasticities of 3.158, -2.274, 1.906, and -1.463, respectively. All
factors depended on law of demand except real GDP. The long term ethanol supply depends on
price of gasoline 95 and real GDP with elasticities of 2.140 and 2.910, respectively. The factors
affecting the demand for biodiesel were price of biodiesel 3 quarters earlier, the number of
vehicles 4 quarters earlier and real GDP 4 quarters earlier with elasticities of 0.558, 2.134, and
1.807, respectively. The price of biodiesel, level of employment, real GDP and compensation
affected the long-run biodiesel supply with elasticities of 3.895, 12.865, 6.648, and 0.768,
respectively. The significant longerun factors affecting demand biodiesel and bioethanol were
real GDP and the number of vehicles. Changes in real GDP affected bioethanol and biodiesel
demand after the subsequent 2 and 4 quarters, respectively. The number of vehicles affected
biodiesel demand after the subsequent 4 quarters. Additionally, factors affecting the supply of
biodiesel and bioethanol were the price of substitution and GDP. It was found that three
important factors affecting long-run biofuel demand (both biodiesel and bioethanol) were price
of biofuel, real GDP and number of vehicles. Factors influencing long-run biodiesel and
bioethanol supplies were price of substitution and GDP.
These findings show important policy implications for biofuel development in Thailand
which need to accelerate policies to meet 2021 target of Thailand Government. First, the results
of the current study found that the prices of gasoline and gasohol are highly elastic to
consumption. The elasticity coefficients of the prices of gasoline 95 and gasohol 95 were 3.158
and 2.274, respectively. Therefore, the pricing policies have strong influences and an important
policy could be that the government set the price of gasoline so that it is higher than price of
gasohol in order to stimulate gasohol consumption. Second, the number of vehicles affected
demand for bioethanol and biodiesel. So, the government policies aiming at incentive for vehicle
manufacturers to produce automobiles that use biofuels could be effective. Examples of such
policies are incentives in the form of low interest loans or tax breaks for increased production.
Finally, demand for biodiesel has a positive relationship with price of biodiesel. Its elasticity
coefficient was 0.588. The government can potentially adjust the price of biodiesel using market
mechanisms to control biodiesel price so that consumers are not impacted. This indicated that
current policy of price fixing may not be needed.
Clearly, further research needs to be conducted on this topic. Time series data on biofuels
are limited and better interpretation of econometric estimations are needed. Moreover, a more
dynamic model structure could be developed in order to capture the economy wide effect of
supply and demand changes resulting from seasonality, biofuel crop failures, and policy reforms.
This study has provided important insights into the relative importance of the prices of gasoline,
diesel, and other biofuels, as well as the number of stations, number of vehicles and
compensation in driving supply and demand for biofuels in Thailand. It also provided a useful
benchmark for future studies related to this topic.

Acknowledgments
The authors would like to thank the Asian Institute of Technology and The HM King's
Scholarship project (King HRD), Energy Policy and Planning Office (EPPO), Ministry of
Energy and Suratthani Rajabhat University for supporting this research.