Ethanol demand under the flex-fuel technology regime in Brazil

This paper analyzes the characteristics of ethanol demand in the context of fuel mix diversification in Brazil. Currently, ethanol is the most important gasoline additive and alternative fuel consumed in Brazil and is responsible there for profound changes in the dynamics of fuel consumption. The diffusion of flex-fuel vehicles in Brazil symbolizes a new stage of ethanol expansion and is a central component of the increasing demand for fuel. Accordingly, we evaluate ethanol demand in Brazil following the introduction of flex-fuel vehicles using a cointegration approach and autoregressive distributed lag bounds tests over the period 2003-2010. The evidences confirm that during the last decade, ethanol has strengthened its position as both an independent fuel and a substitute for gasoline. There is also evidence that growth in the Brazilian automobile fleet based on flex-fuel technology is a major driving factor of long-run ethanol demand. Further, the dynamics of gasohol (mandatory blend of gasoline and ethanol) and ethanol prices operate in a symmetric manner over ethanol demand, thereby evidencing the increasing substitutability between these alternative fuels.

Research Highlights► This paper analyzes the characteristics of ethanol demand in the context of fuel mix diversification in Brazil. ► During the last decade, ethanol has strengthened its position as both an independent fuel and a substitute forgasoline. ► The growth in the Brazilian Automobile fleet based on flex-fuel technology is a major driving factor of long-run ethanol demand.