Arbitrage between ethanol and gasoline: evidence from motor fuel consumption in Brazil

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2013-01-01
Authors
Pouliot, Sebastien
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Economics
Abstract

Unlike regular cars, ex-fuel vehicles (FFVs) allow motorists to fuel on motor blends that contain between zero and one hundred percent of ethanol. This paper investigates how motorists arbitrage between hydrous ethanol and gasoline using aggregate fuel consumption data in Brazil. The ability of FFV motorists to arbitrage between fuel blends shapes of aggregate demands for hydrous ethanol and gasoline. I estimate using nonlinear seemingly unrelated regressions the demands for hydrous ethanol and gasoline in Brazil, and motorists preferences for hydrous ethanol. I find that on average, accounting for the relative energy contents of the two fuels, FFV motorists in Brazil slightly discount hydrous ethanol over gasoline. Most consumers switch between fuels when their relative prices are at near parity. I find that 20% of consumers still purchase hydrous ethanol when its price is about 10% above the price of gasoline. The distribution of preferences is not symmetric as 20% of consumers still purchase gasoline when there is a 15% discount on the price of hydrous ethanol.

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This is a Selected Paper prepared for presentation at the Agricultural & Applied Economics Association’s 2013 AAEA & CAES Annual Meeting, Washington DC, August 4-6, 2013.

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Tue Jan 01 00:00:00 UTC 2013