Innovation Seminar Series

Relationships and Dynamics Between Ethanol and Gasoline Prices in Brazil

Presented by Janelle Mann, University of Manitoba

Abstract

This paper investigates the long run relationship between retail prices for two fuel types, ethanol and gasoline.The geographic region of choice for the investigation is Brazil because fuel stations sell both ethanol and gasoline (in addition to diesel), and the majority  of passenger vehicles in Brazil are flex-fuel vehicles (FFVs), having the ability to run on both gasoline and ethanol or a combination of the two. Ad­ ditionally, consumers in Brazil have ready access to information on the prices of both fuels through Smartphone apps. These apps also give them capability to calculate gasoline equivalency to ethanol, to support  price comparison.Brazilians are thereby able to practice fuel substitution in their FFVs with  minimal  search and transaction costs, which makes them good candidates for study. The econometric tests applied to investigate the long run relationship are the Westerlund (2007) panel cointegration tests using weekly data from January 1,2014 through August 23,2015. Preliminary results indicate that the retail price of gasoline and ethanol follow a long run relationship which is restored should they temporarily deviate from each other.