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

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  • Pouliot, Sebastien

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.

Suggested Citation

  • Pouliot, Sebastien, 2013. "Arbitrage between ethanol and gasoline: evidence from motor fuel consumption in Brazil," ISU General Staff Papers 201301010800001007, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:201301010800001007
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    References listed on IDEAS

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    1. Anderson, Soren T., 2012. "The demand for ethanol as a gasoline substitute," Journal of Environmental Economics and Management, Elsevier, vol. 63(2), pages 151-168.
    2. Du, Xiaodong & Carriquiry, Miguel A., 2013. "Flex-fuel vehicle adoption and dynamics of ethanol prices: lessons from Brazil," Energy Policy, Elsevier, vol. 59(C), pages 507-512.
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    Cited by:

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    2. Sebastien Pouliot & Bruce A. Babcock, 2014. "Impact of Ethanol Mandates on Fuel Prices when Ethanol and Gasoline are Imperfect Substitutes," Center for Agricultural and Rural Development (CARD) Publications 14-wp551, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    3. Sébastien Pouliot & Kenneth A Liao & Bruce A Babcock, 2018. "Estimating Willingness to Pay for E85 in the United States Using an Intercept Survey of Flex Motorists," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(5), pages 1486-1509.
    4. Christensen, Adam & Hobbs, Benjamin, 2016. "A model of state and federal biofuel policy: Feasibility assessment of the California Low Carbon Fuel Standard," Applied Energy, Elsevier, vol. 169(C), pages 799-812.
    5. Christensen, Adam & Siddiqui, Sauleh, 2015. "Fuel price impacts and compliance costs associated with the Renewable Fuel Standard (RFS)," Energy Policy, Elsevier, vol. 86(C), pages 614-624.

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