THE ELASTICITY OF DEMAND FOR GASOLINE IN BRAZIL WITH THE
INTRODUCTION OF THE FLEX–FUEL FLEET
Ana Isabel Santos, Universidade Federal do Rio de Janeiro (UFRJ), 00351 91 7451910, anaisabelasantos@hotmail.com
Marcelo Colomer Ferraro, Universidade Federal do Rio de Janeiro (UFRJ), 0055 21 986380044, marcelo.colomer@gmail.com
Overview
In this article, the primary objective is to describe the correlation between the prices of gasoline and ethanol
in Brazil from 2003, and the variables with the greatest impact on the pricing of hydrous ethanol fuel.
Ethanol production was, for several decades, one of the biggest promises of the Brazilian economy.
However, before the apparent economic infeasibility of the industry, fossil fuels recovered a share in the market.
The turning point occurred at start of the 21st century, with the introduction and distribution throughout the country
of the flex-fuel fleet, which in 2013 already represented about 47 percent of the Brazilian fleet.
The consumer is given a more active role at the time of refuelling their car. They are given the opportunity to
choose. They can opt for a biofuel or a fossil fuel. A decision which will invariably be influenced by the price of
ethanol or gasoline.
Brazil was a pioneer in the production of ethanol made from sugar cane. Its introduction in the energy
matrix of the country happened in the early twentieth century and addressed two major problems: i) the high
dependence on imported oil and ii) the successive crises that was targeting the sugar sector.
The first experience with ethanol in Brazil happened in 1925. Eight years later, and during the term of Getúlio
Vargas, the Institute of Sugar and Alcohol was created - IAA was enacted mandating the blending of ethanol in
gasoline.
In the 70s the National Alcohol Program was launched that promoted more strongly the reduction of the
country's dependence on imported oil. At that time Brazil imported about 80 percent of the oil it consumed.
However, despite the successive fluctuations in the price of 'black gold' in international markets, the
ethanolindustry was not economically competitive and its sustainability for several years was assured by state
subsidies. From the mid-80s, the state tried to reduce its role in the sector, with the extinction of IAA in 1990 and
the cut to subsidies for sugar production. The country became one of the major exporters of this commodity.
Methods
The introduction of flex -fuel fleet in Brazil, turned ethanol and gasoline, what in economics terms is
designated as substitute products. How do both fuels prices behave? What is the consumer new behavior? And wich
relationship these two variables have on each other’s prices?
To answer this questions, we developped an econometric model (an OLS with progressive introduction of
instrumental variables) which allowed rigorous analysis of the weight of various exogenous variables - gasoline C
prices, ethanol sales and climatic conditions - in the price of this biofuel. The state of São Paulo was the target of
analysis since it is a reference in the production and consumption of this type of fuel in Brazil.
Results
For the model we built (an OLS with instrumental variables) the coefficient of determination R2 obtained
was 95%. This signifies that 95% of data variability is explainable by the covariates of the regression model. The
result also allows shows that two explanatory variables were significant in the ethanol price - they show a p-value
below 0.05 – i.e. the price of gasoline and climate.
Conclusions
Flex-fuel fleet penetration in Brazil lead to a substancial rebirth of ethanol industry, after decades of crisis
in this sector. However, from 2010 and until nowadays, ethanol became no more attractive to consumers, as it
reached 70% of the price of gasoline C. This ceil represents the cross-price elasticity of demand for gasoline and
ethanol. This happened because of the sugar cane crops and ethanol production, which were insufficient to ensure its
competitiveness.
The variables that strongly influence ethanol prices, as noticed by the OLS model, are climatic conditions
and gasoline prices. Since 2008, and because of the reduction of CIDE to zero, the source of volatility of gasoline
became smaller, and the price fluctuations are now only offset by an oil price increase or decrease. So its influence
on ethanol might be residual.
So, the only change of ethanol, to readjust its price, is an outstanding sugar cane crop – strongly dependent
on weather conditions – and production.
However, explaining the origin of ethanol prices in the Brazilian market and analyse its elasticity-price
crosse demand with gasoline, is an issue that goes far beyond the econometric models, as the market price can be
determined by companies, based on cost and profit margins.
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