Consumer choice between ethanol and gasoline: Lessons from Brazil and Sweden

The introduction of flex-fuel vehicles since 2003 has made possible for Brazilian drivers to choose between high ethanol blends or gasoline depending on relative prices and fuel economies. In Sweden, flex-fuel fleets were introduced in 2005. Prices and demand data were examined for both Brazil and Sweden. Bioethanol has been generally the most cost-efficient fuel in Brazil, but not for all states. In any case, consumers in Brazil have opted for ethanol even when this was not the optimal economic choice. In Sweden, a different behavior was observed when falling gasoline prices made E85 uneconomical in late 2008. In a context of international biofuels expansion, the example of E85 in Sweden indicates that new markets could experience different consumer behavior than Brazil: demand falls rapidly with reduced price differences between ethanol and gasoline. At the same time, rising ethanol demand and lack of an international market with multiple biofuel producers could lead to higher domestic prices in Brazil. Once the limit curve is crossed, the consumer might react by shifting back to the usage of gasoline.

Research highlights
► Brazil and Sweden both have infrastructure for high fuel ethanol blends.
► Flex-fuel vehicles enable competition between ethanol and gasoline in fuel markets.
► Data suggests that consumers make their fuel choice based mainly on prices.
► Consumers in Sweden appear to be more price-sensitive than their Brazilian counterparts.
► In the absence of international markets, high ethanol prices may drive consumers back to gasoline.