Influence of renewable energy trends on fossil fuel refining operations

Abstract

This study examines how renewable energy indicators such as biofuel prices, biofuel integration, electrification, and carbon allowance prices relate to refined fuel production in Portugal’s refining sector. This is set against the backdrop of the sector’s decarbonization efforts and the economic pressures to meet European Union climate targets. The research employs a vector error correction model using monthly data from January 2019 to June 2024 to analyze both short- and long-term dynamics. The results show significant volatility in fossil fuel production associated with fluctuations in biofuel prices and carbon allowances. Additionally, biomass production exhibits an initially negative relationship with refining, while biofuel incorporation shows a slightly positive initial association. In both cases, the relationship with refining output becomes unstable over time. Contrary to expectations, the initial increase in energy consumption for electric vehicle charging appears to stimulate refined fuel production, although this effect weakens over time throughout the period analyzed. As a robustness check, the results were validated using an autoregressive distributed lag error correction model, which confirmed the short-term adjustment patterns and provided additional insight into the long-term dynamics. The findings emphasize the need for a gradual adaptation strategy that invests in co-processing technologies and flexible operations to transition from fossil-based products to renewable alternatives. Policymakers should ensure regulatory stability to boost the competitiveness of biofuels and promote a more sustainable refining sector.