Flex-fuel vehicle adoption and dynamics of ethanol prices: lessons from Brazil

• Published in: Energy policy 2013-08, Vol.59, p.507-512
• Main Authors: Du, Xiaodong, Carriquiry, Miguel A.
• Format: Article
• Language: English
• Subjects: Applied sciences; Brazil; Consumers; Dynamics; Economic data; Economic theory; Energy; Energy economics; Energy policy; Energy resources; Estimating techniques; Ethanol; Ethyl alcohol; Exact sciences and technology; Exports; Fleet composition; Fuel; gasoline; Gasoline prices; General, economic and professional studies; Ground, air and sea transportation, marine construction; International trade; Latin America; Markets; Mathematical models; Mean reversion; Motor vehicle fleets; Natural energy; Petrol; Prices; Relative ethanol price; Studies; sugars; Supply and demand; supply balance; Transportation planning, management and economics; Vehicles
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2013.04.008

Focusing on dynamics of the relative prices of substitute fuels, namely ethanol and gasoline, this study quantifies the impact of the increase in shares of flex-fuel vehicles (FFVs) in the vehicle fleet on the domestic ethanol prices in Brazil. A modified partial adjustment model is employed. Estimation results provide strong support for our research hypotheses: (i) when consumers can choose between the fuels the relative ethanol and gasoline prices converge to a long-run equilibrium level, which is determined by the fuel economy, and (ii) price dynamics are largely determined by market supply and demand factors including the price of sugar, ethanol exports, and composition of vehicle fleet. Furthermore, the impacts of demand factors such as ethanol exports are strengthened by the increasing proportion of FFVs in the vehicle fleet. •The relative prices of ethanol and gasoline in Brazil exhibit strong mean-reversion.•The fuel price dynamics are mainly influenced by supply and demand factors.•The impacts of demand factors are strengthened by the increasing proportion of FFVs.