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Energy 81 (2015) 696e705

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An analysis of the impact of Flex-Fuel vehicles on fuel consumption

in Brazil, applying Cointegration and the Kalman Filter
 M.A. Gomez a, b, *, Luiz F.L. Legey a, 1
a ria, Ilha do Funda
Energy Planning Programme, Federal University of Rio de Janeiro, Centro de Tecnologia, Bloco C, Sala 211, Cidade Universita ~o, Rio de
Janeiro, RJ 21941-972, Brazil
b leo Brasileiro S.A. (Petrobras), Brazil
Fuels Marketing Planning, Petro

a r t i c l e i n f o a b s t r a c t

Article history: The aim of this article is to analyze the impact of Flex-Fuel technology on the consumption of fuels in
Received 12 September 2014 Brazil. Applying the methodology suggested by Hall (1993), combining an Error Correction Model (ECM)
Received in revised form with the Kalman Filter (KF), we studied the influence of the relative prices of Hydrous Ethanol and
8 December 2014
Gasoline C on the consumption of these fuels. We analyzed structural breaks in the time series and the
Accepted 5 January 2015
Available online 28 January 2015
evolution of parameters over periods of time. We found that the introduction of Flex-Fuel technology
into the Brazilian fleet of light passenger and cargo vehicles had a significant impact on the pattern of
demand for fuel in the country. In particular, we noted the following: (i) the existence of a structural
Error correction model (ECM)
break in the time series of demand for Hydrous Ethanol and Gasoline C; (ii) the marked effect of situ-
Kalman Filter (KF) ations in which there was a reduction in the availability of Hydrous Ethanol for the fuel market; (iii) the
Flex-Fuel increasing importance, in terms of demand, of the ‘Ethanol-Gasoline C relative price’ variable. We
Cointegration concluded that all these factors are due to the technological advance in Flex-Fuel vehicles, which enables
Hydrous Ethanol-Gasoline C consumers to choose between Ethanol and Gasoline C when refueling vehicles e the decision for most
vehicle drivers being essentially based on cost-benefit considerations. We consider the findings relevant
given that several economic and climatic factors indicate that there is a strong likelihood of long term
variation in the relative price of Ethanol and Gasoline C in Brazil. Government and key players in the
energy field will consequently need to adopt a clear strategy, based on reliable data, in order to deal with
fluctuating supply and demand for both fuels. Furthermore, the methodology used in this study and the
findings obtained are relevant to future studies into the likely impact of future technological and eco-
nomic developments in the Brazilian fuel market, such as the introduction of electric vehicles.
© 2015 Elsevier Ltd. All rights reserved.

1. Introduction between fuels, taking into account, in particular, the relative effi-
ciency and price of Hydrous Ethanol and Gasoline C.3
The Brazilian market fuel for Otto Cycle vehicles (passenger cars, The Flex-Fuel technology, implemented in Brazil on a commer-
light commercial vehicles and motorcycles) is undergoing major cial scale from March 2003 onwards, uses an electronic sensor
technological transformation with the advent of Flex-Fuel vehi- which tells the command unit of the electronic injection system the
cles.2 The type of fuel used to power these vehicles is now defined composition of the fuels present in the tank, so that the engine is
at the pumps rather than at the assembly plant. Drivers can choose able to optimize the combustion of fuel whatever proportion of
Gasoline C to Ethanol the consumer chooses. The emergence of this
type of engine is capable of significantly altering the dynamics of
competition between fuels, both in microeconomic terms e in that
different products are capable of being virtually perfect substitutes
* Corresponding author. Av. Henrique Valadares, 28, 10A, Rio de Janeiro, RJ
20031-030, Brazil. Tel.: þ55 21 998051855.
E-mail addresses: (J.M.A. Gomez),
(L.F.L. Legey). Gasoline C is a blend of pure Gasoline (or Gasoline A) and Anhydrous Ethanol, in
Tel.: þ55 21 25628766. a rate of between 18 and 25% (Brazilian legislation permits a positive or negative
Flex-Fuel vehicles can use either Gasoline C or Hydrous Ethanol as fuel. variation of one percentage point in the blend).
0360-5442/© 2015 Elsevier Ltd. All rights reserved.
J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705 697

for each other e and on a macroeconomic scale due to influence of was inelastic in the short term, but elastic (elasticity close to 1) in
the aggregate consumption of these fuels on the country's energy the long term. This last result confirmed the supposition that de-
matrix. mand for Gasoline responds with greater intensity to long term
Hydrous Ethanol has approximately 70% of the calorific value of changes in income4 than to short term changes.
Gasoline C. Thus, in situations in which the price of Hydrous Bentzen (1994) [4] sought to identify the factors that affected
Ethanol is above 70% of the price of Gasoline C, it is economically Gasoline consumption in Denmark. He, also, applied the Engle and
more advantageous for the consumer to refuel with the latter. Granger Cointegration techniques (1987) using a sample period
Conversely, if Hydrous Ethanol is sold at less than 70% of the price from 1948 to 1991. His model used the real price of Gasoline; per
of Gasoline C, it generally makes more sense for the consumer to capita vehicle fleet; and per capita Gasoline consumption as inde-
opt for Ethanol. There are other factors which the consumer may pendent variables and also incorporated a trend variable. The re-
take into account, including environmental issues and the lower sults showed that demand for Gasoline was price-inelastic both in
frequency of refueling that is necessary with the Gasoline C, the short and the long term, but that short and long term elastic-
compared to Ethanol. However, for most consumers the deter- ities in relation to the vehicle fleet per capita were close to 1. This
mining factor is likely to be price. last result was unsurprising, given that it is to be expected that
The per capita consumption of Gasoline C and Hydrous Ethanol changes in fleet size will have a direct effect on Gasoline con-
between 2002 and 2011 mirrored (albeit at lower levels) the overall sumption, but Bentzen's estimates (1994) further suggest the
increase in the total consumption of these fuels. Total consumption presence of rapid adjustment velocity towards long term equilib-
of Gasoline C and Hydrous Ethanol increased by 5.1% and 12.4% p.a., rium, which is significant.
respectively, with per capita consumption increasing by 4.0% p.a. Using data gathered in Brazil, Alves and Bueno (2003) [1] sought
(Gasoline C) and 11.2% p.a. (Hydrous Ethanol). Both overall and per to establish the determining factors for per capita consumption of
capita consumption in the period reflect official policies of Gasoline in this country. They broadened the analyses carried out in
encouraging for flexible financial credit schemes enabling vehicle the three studies referred to above in order to incorporate the in-
purchase and reducing taxes on vehicle production. These factors, fluence of Ethanol on the consumption of Gasoline C, applying an
combined with increasing average incomes (notwithstanding the estimate of cross price elasticity. Again, they used the Engle and
2008 financial crisis) enabled many lower income families to ac- Granger (1987) [12] Cointegration techniques to capture the short
quire vehicles. The lower rates of per capita consumption compared and long term dynamics for Gasoline C. Their sample period ran
to overall consumption reflect the fact that the lower income from 1974 to 1999 (with a reduced period of 1984e1999 for the real
families acquiring new vehicles tended to make less use of the price of Ethanol). The model specified the real price of Gasoline; the
vehicles (and hence consumed less fuel per capita) than the higher real price of Ethanol; and per capita GDP as independent variables.
income groups. Furthermore, the increasing energy efficiency of The variables were tested for stationarity, and the researchers
vehicles meant lower rates of per kilometer fuel consumption. identified unit roots in each variable. They also added a quadratic
Much has been written both in Brazil and abroad on the con- trend in order to fine tune the model.
sumption of fuels and the factors that have an impact on the evo- Cointegration tests rejected the null hypothesis of a unit root in
lution of demand. We refer here only to the literature which has the the residues. The results demonstrated that: (1) the signs of the
most bearing on our study. parameters of the models were as expected; (2) a demand for
Polemis (2006) [24] analyzed the variables which had an impact Gasoline was income-inelastic in the short term and there was a
on the demand land transportation fuel in Greece. He found that high velocity of adjustment to equilibrium in the long term (albeit
overall demand increased 44% between 1990 and 2002 with an that the authors of the study acknowledged that this last finding
increase in Gasoline consumption of around 4% per annum (p.a.) may have been the result of the relatively small size of the sample
from 1988 to 2001. The author applied Johansen's Cointegration available); (3) the price-elasticity of Gasoline was low in the long
techniques (1988) in order to detect the short and long term dy- term and very low in the short term; (4) the cross-price elasticity
namics for Gasoline and Diesel in a sample period running from between Ethanol/Alcohol and Gasoline was positive, albeit small,
1978 to 2003, drawing on annual data. He applied the following suggesting that these fuels were substitutes (but not perfect sub-
independent variables: per capita GDP; the (deflated) prices of stitutes). The need to incorporate a quadratic trend into the model
Gasoline and Diesel; and the per capita vehicle fleet. The model was, according to Alves, the result of repeated adjustments in the
used a trend variable in order to capture possible technological Brazilian economy during the past thirty years in response to the oil
advances. The results obtained confirmed the anticipated signals crisis.
for all elasticities. The trend variable was not, however, significant: Ramanathan (1999) [25] studied the demand for Gasoline in
the models did not indicate technological development of vehicles, India and its effects on the balance of payments, economic growth
at least in terms of reduction of consumption per kilometer driven. and the fiscal deficit. Gasoline consumption in the country
The results did demonstrate that the long term demand for Gaso- increased by around 7% p.a. between 1981 and 1984. Ramanathan
line was price-inelastic but income-elastic. There was also a low applied the Engle and Granger (1987) [12] Cointegration techniques
level of substitutability amongst the fuels, due to the low coefficient in order to determine the short and long term elasticities in the
of cross-elasticity of petroleum products. sample period of 1972e1994 on the basis of annual data. The model
Eltony and Al Mutairi (1995) [10] sought to identify the variables he proposed used the real price of Gasoline; per capita GDP; and
that had an impact on the demand for Gasoline in Kuwait. They per capita consumption of Gasoline as independent variables, all in
applied the Engle and Granger Cointegration techniques (1987) in logarithmic form. Ramanathan performed stationarity tests which
order to capture short and long term dynamics in a sample period indicated the presence of a unit root in the level and Cointegration
from 1970 to 1989, using annual data. The study used the real price tests which rejected the null hypothesis of unit root in the residues.
of Gasoline and per capita income as independent variables in the The results obtained showed that: (1) the price of Gasoline was
logarithmic form. The tests indicated the presence of a unit root in inelastic both in the short and long term; (2) the velocity of the
the level and rejection of this hypothesis following the first- adjustment of demand for Gasoline to long term equilibrium was
difference of all the time series. The study showed that the de-
mand for Gasoline was price-inelastic both in the short and long
terms. In relation to per capita income, on the other hand, demand The pace (velocity) of adjustment to long-term equilibrium is 52%, in one year.
698 J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705

Fig. 1. Consumption of Gasoline C, Hydrous Ethanol and Compressed Natural Gas (CNG) as Gasoline C equivalents and the real monthly payroll in Brazil (converted to US dollars);
data from ANP and IBGE.

28% in the first year; (3) the short and long term price elasticities our study presents greater precision in the projection of Gasoline C
were lower in India than in Denmark or Kuwait, whilst income- consumption for the twelve months following the analyzed sample
elasticity was much greater in India5; and (4) income-elasticity (the year being 2012) (Mean Absolute Percentage Error e MAPE of
was high, albeit that e as expected e it was higher in the long 4.80%).
term than the short term. In the following section we set out an overview of the market for
Finally, Schünemann [26], also relying on the Engle and Granger fuels in Brazil. In Section 3 we present a model for the analysis of
(1987) [12] Cointegration techniques, constructed models to the effects of Flex-Fuel vehicles on the demand for Gasoline C. In
analyze fuel consumption in Brazil for the 1970e2005 period, using Section 4 we set out the results obtained in the model and in
as independent variables the per capita fleet; average age and Section 5 we set out our conclusions.
average efficiency of the fleet; fuel prices; and per capita GDP. The
results obtained demonstrated that: (1) the per capita fleet and the
per capita GDP were significant variables, provided they were not
used jointly. This was also the case for the average age and average 2. The fuel-market in Brazil: the effect of Flex-Fuel vehicles
efficiency of the fleet variables6; (2) the variables of price of Hy-
drous Ethanol and Compressed Natural Gas (CNG) were not sig- In Brazil, the Otto-cycle segment (light passenger and cargo
nificant; (3) in the Gasoline consumption model, the dummy vehicles and motorcycles) is powered by Gasoline C, Hydrous
variable representing the introduction of Flex-Fuel vehicles into the Ethanol and Compressed Natural Gas (CNG). We set out the
fleet was (relatively) significant7; (4) for Gasoline consumption, (monthly) evolution of the market share of each of these fuels, in a
income-elasticity was high in the long term and low in the short period running from July 2001 to December 2011, in Fig. 1, which
term e again, as expected; and (5) price-elasticity, although greater also features the real monthly payroll8 over the same period.9
in the short term than the long term, was low in both cases. Fig. 1 shows that the evolution of consumption of the three
The main characteristics which distinguish our study from those Otto Cycle fuels (Gasoline C, Hydrous Ethanol and CNG) followed
referred to above are as follows: (1) we used monthly data covering a very similar pattern to the evolution of the real (monthly)
a period of over 11 years; (2) we analyzed the sensitivity of demand wages (i.e. the real monthly payroll) throughout the observed
to the relative price of Hydrous Ethanol-Gasoline C, applying the period taking into account the impact of specific Brazilian
methodology of Hall (1993) [14] and the Kalman Filter [18]; and (3)
The total value of salaries (minus inflation) paid in Brazil. The Portuguese term
for ‘real monthly payroll’ is ‘massa salarial real’.
5 9
Possible explanations for this include the low levels of Gasoline consumption in We obtained the information on the consumer sales of C Gasoline, Hydrous
India and the strong growth of the Indian economy. Ethanol and CNG from the Brazilian National Agency for Petroleum, Natural Gas and
This probably occurs because these variables reflect trends which are strongly Biofuels e ANP. We obtained data on the real monthly payroll (an indicator which
correlated, leading to their colinearity. based on the number of people employed and the mean nominal income they
This “relative significance” may be the result of the short period of time that has normally receive) from the Brazilian Institute for Geography and Statistics e IBGE.
elapsed since the introduction of Flex-Fuel vehicles into the fleet, so that it is not We deflated this variable applying an Extended Retail Price Index e IPCA, again
possible to categorically state, at this stage, that there have been changes in the provided by the IBGE and converted the result into US dollars applying the Brazilian
parameters of the model for Gasoline consumption. Central Bank (Bacen) Ptax average monthly rate. The sample size was 126 periods.
J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705 699

Fig. 2. Evolution of the Brazilian production of Total Ethanol (Anhydrous þ Hydrous), Million m3 and Brazilian Production of Sugar, Million Tons; data from MAPA (Brazilian Ministry
of Agriculture) [21].

legislation which requires employers to pay mandatory end of significant amount of Sugar-Cane could not be harvested (because
year bonuses in December10. the machines used for harvesting cannot be used on Sugar-Cane
From 2002 to 2011, the consumption aggregate increased at a fields when the soil is extremely wet). This un-harvested Sugar-
rate of 6.2% p.a. whilst real wages (calculated in Brazilian currency) Cane remained in the fields, increasing re-sprouting and the
increased at a rate of 4.0% p.a. In fact, the Brazilian currency quantity of aerial roots, which in turn reduced the Total Recover-
appreciated considerably during this period, so that, in US dollar able Sugar (TRS), affecting the performance of the industry; (4) in
terms, real wages increased by 10.3%. The fact that the consumption the Northeastern region (responsible for approximately 10% of
of fuel evolved at a higher rate than real wages (when calculated in Brazilian Sugar-Cane production) rainfall was lower than average,
local currency) was due to the Brazilian government's reduction of both during the vegetative development phase and during the
interest rates during this period in order to stimulate economic harvest, which hampered the development of cane left as seeds for
activity, allied with the introduction of further credit and fiscal the next harvesting season [7].
policies which favored the purchase of vehicles. The 2009/10 harvest was dominated by the demand for Sugar,
In relation to Hydrous Ethanol, it can be seen that following a because of crop failures in the main Sugar producing countries.
rapid expansion in consumption (Fig. 1) and in Ethanol production India, for instance, ceased exporting and began importing Sugar.
(Fig. 2) between 2002 and 2009, no clear pattern emerges. The lack The pressure on supply opened up fresh trade opportunities for
of a clear pattern is particularly marked post 2010. Possible ex- Brazil and led to record price increases. In fact the price of Sugar
planations for this fact include: (1) the impacts of the 2008 financial increased 80%, on average, as compared to the previous harvest
crisis, which led to a reduction in the capital available for invest- (ibid.). These consolidated factors induced a considerable increase
ment and financing of Sugar-Ethanol activities [8]; (2) the increase in the 2010/2011 Brazilian production of Sugar, to the detriment of
in the price of sugar on the international market, which led to Sugar Ethanol (Fig. 2). There was then lower availability of Hydrous
becoming more financially attractive than Ethanol; and (3) climate Ethanol and higher prices.
problems which affected the production of the main raw material Consumption of Gasoline C grew minimally between 2002 and
for Ethanol (Sugar-Cane). 2009. This was largely due to the weak performance of the Brazilian
The climate problems referred to in (3) above, can be traced to economy up until 2003. The introduction of flex fuel vehicles, in
the following: (1) abnormally heavy rainfall (which, despite stim- March 2003, then enabled the consumer to decide which fuel to use
ulating vegetative development, hampered the concentration of based on cost-benefit factors, which, during this period, favored the
sucrose in the Sugar-Cane) during most of the cultivation cycle, use of ethanol. It can also be seen from Fig. 1 that there was,
particularly in the South Central Region, which is responsible for however, a marked increase (over 30%) in the consumption of
around 90% of the production of Brazilian Sugar-Cane; (2) crushing Gasoline C between end 2009 and end 2011. The Gasoline C prices
of Sugar-Cane at levels below the installed capacity of the mills, on the Brazilian internal market did not increase at the same pace
leading to losses for farmers due to reduced production of Sugar as prices on the international market. This was due to the com-
and Ethanol during this period; (3) the heavy rainfall meant that a mercial pricing policies of the state-owned oil company Petrobras
(which is the largest producer of petroleum products in Brazil -
holding approximately 99% of the market). These Petrobras policies
There has been a law in Brazil, since 1962, granting all workers the right to were aimed at reducing the impact on the domestic market of in-
receive a ‘thirteenth’ salary, normally paid during the month of December. ternational price volatility.
700 J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705

Fig. 3. Comparison between the real prices of Gasoline C, Hydrous Ethanol and CNG in US$/km; data from ANP.13

CNG has a relatively minor share of the Otto Cycle market referred to above. During the same period the price of Hydrous
(approximately 5% overall). The data shows accelerated growth of Ethanol increased about 3.8% p.a. And at the earlier period of
the consumption of this fuel up until 2007 (21.1% p.a., since 2002) 2002e2007, Gasoline C prices had increased 2.5% p.a. whilst
followed by a sharp decline until 2011 (6.3% p.a.). This was caused CNG prices grew at 4.4% p.a. and Hydrous Ethanol prices at 1.2%
by turmoil in gas supplies from Bolivia (the country which sup- p.a.
plied 57% of the natural gas available in Brazil in 2007) [23].11 The As can be observed in Fig. 3, Hydrous Ethanol is competitive and
problems with Bolivia led to an increase in the price of CNG which this may explain the success of Flex-Fuel vehicles, which accounted
was almost double the corresponding price increase for for 67% of total vehicle sales between 2003 and 2011. By 2011, Flex-
Gasoline C. Fuel vehicles made up 51% of the total fleet, as can be seen in Fig. 4.
Fig. 3 presents the relative competitiveness of Gasoline C, Hy- We based our estimates as to the evolution of the fleet (set out in
drous Ethanol and CNG, drawing on an energy efficiency ratio be- Fig. 4) on the study undertaken by Mattos & Correia (1996) [22].
tween these three fuels, based on the BEN 2012 [3] (Brazilian This study drew on data relating to the sale of vehicles, correlated to
National Energy Bulletin) and the price of domestic fuels multiplied the type of fuel used [2], in conjunction with a Gompertz type
by the monthly US dollar exchange rate. In fact, the use of CNG has vehicle-scrapping curve, based on 1988 data from the Brazilian
various disadvantages such as the need for conversion equipment Institute for Geography and Statistics (IBGE) National Sample Sur-
(which became more expensive following the introduction of more vey of Households (PNAD).
stringent safety rules); reduced performance; limited autonomy As stated earlier, according to the ANP, the price of Hydrous
and the reduction in the re-sale value of the vehicle. These limi- Ethanol needs to be below 70% of the price of Gasoline C in order
tations dampen consumer interest in CNG, which is more to be an attractive alternative, given that Hydrous Ethanol has
commonly consumed by intensive use vehicles such as taxis.12,13 lower calorific power than Gasoline C. Fig. 5 represents the price
CNG prices increased at almost the same pace as Gasoline C ratio of these fuels between July 2001 and November 2011. The
prices from 2007 until 2011 (CNG prices increased 1.8% p.a. and Figure shows that in the later periods of the sample, Ethanol
Gasoline C prices increased 1.0% p.a.) so that the reasons for breached the 70% barrier so that its competitiveness was
decreased CNG consumption during this period were the factors undermined.
In the following section we set out a model representing the
evolution of the Brazilian fuel market, in order to analyze the extent
of the impact of Flex-Fuel vehicles.
By 2011, the share of Bolivian gas in Brazilian consumption had decreased to
approximately 44%, according to the MME (Brazilian Ministry of Mines and Energy),
12 3. A model for the analysis of the effect of Flex-Fuel vehicles
Flex-Fuel vehicles can be modified so as to use CNG, in addition to Gasoline C
and Hydrous Ethanol. However, contrary to the use of any mix of Gasoline C and
Hydrous Ethanol, the consumer has to select either CNG or the mix. A Cointegration analysis between the possible variables of the
We obtained the information on the consumer prices of C Gasoline, Hydrous model (following the methodology of [17] and [12]) requires, first of
Ethanol and CNG from the Brazilian National Agency for Petroleum, Natural Gas and all, that all the variables of the model be of the same order of
Biofuels e ANP. These variables were deflated applying an Extended Retail Price
Index e IPCA provided by the IBGE and converted into US dollars applying the
integration. The second condition is that the linear combination of
Brazilian Central Bank (Bacen) Ptax average monthly rate. The sample size was 126 the model must result in a series which has an order of integration
periods. lower than that of the original series [15,16].
J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705 701

Fig. 4. Evolution of the share of Flex-Fuel vehicles in the Brazilian fleet of light vehicles; data from ANFAVEA (the Brazilian National Association of Automobile Manufacturers) and
Mattos & Correia (1996).

We applied the procedure suggested by Johansen (1988) [17] in We then analyzed the possibility of a structural break in the
conjunction with the guidelines set out by Enders (2004) [11]. The consumption of Gasoline C series, using the techniques employed
methodology we used also enabled us to test restricted versions of by Chow (1960) [6] and the Kalman Filter [18], as in the method-
the Cointegrating vectors and to analyze the parameter that in- ology proposed by Hall (1993) [14]. This approach uses a Time
dicates the pace of adjustment between short and long term dy- Varying Parameter - Error Correction Model (TVP-ECM), which al-
namics of the time series, thus making it possible to establish the lows for a flexible analysis both of the long term relationship be-
chain of causality between the model's variables, using the Granger tween the variables and the short term dynamics [5]. Two
Causality Test [27]. equations are estimated simultaneously by the Kalman Filter state

Fig. 5. Comparison of the real prices (Brazilian averages) of Hydrous Ethanol and Gasoline C ratio; data from ANP.
702 J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705

space algorithm: an observation equation and a space equation. The Table 1

latter demonstrates the evolution over time of the parameters of Tests of unit root in the variables (logarithmic transformation).

the first equation. Variable Optimal t-stat (critical values: p-value

The specification of the model is as follows: lag length 5%: 3.445877 1%: 4.032498)
Observation Equation: Gasoline C 12 1.198766 0.9999
Hydrous Ethanol 1 2.539419 0.3090
DCgct ¼b1 þ b2 DSubstt1 þ b3 DMassat1 CNG 12 3.023041 0.1302
(1) Real Gasoline C price 1 3.260314 0.0779
þ aðCgct1 þ sv1t Substt1 þ b4 Massat1 þ b5 Þ Real Hydrous 3 4.656900 0.0013
Ethanol price
State Equation: Real CNG price 1 1.680993 0.7540
Real Monthly Payroll 12 2.157158 0.5088
sv1t ¼ sv1t1 þ vt (2) Subst 6 2.587743 0.2867

particular, since sugar and Ethanol are almost perfect sub-
 Cgct is the Consumption of Gasoline C, in m3, at time t; stitutes in terms of sugar-cane products, their total production
 a is the Adjustment Coefficient between Long and Short terms. vary in accordance to their relative prices in international
 Substt is the price ratio between Hydrous Ethanol and the price markets. Thus, the influence of global fuel markets is (indirectly)
of Gasoline C at time t; present in the model.
 Massat is the Real Monthly Payroll, in Brazilian currency, at time 7. However, over the past 5 years, the domestic price of Gasoline
t; has evolved at a slower rate than the prices of Hydrous Ethanol
 DSubstt is the first difference in the price ratio of Hydrous and sugar, as a result of the pricing policy of Petrobras, which is
Ethanol and Gasoline C, at time t; the principal player in the fuels market in Brazil. Petrobras has
 DMassat is the first difference in the Real Monthly Payroll at time sought to protect this market from international volatility,
t; which is in contrast with what happens in other countries, like
 sv1t is the (variable) parameter of the price ratio of Hydrous for example the USA, where gas station prices are heavily
Ethanol and Gasoline C, at time t; influenced by daily fluctuations in the international price of oil.
 vt is the vector of error terms at time t. Such a policy causes a marked disparity between international
price fluctuations and their Brazilian counterparts. For this
The considerations that guided the specification of this model reason, we decided not to include explicitly international price
are the following: indicators in the model.

1. The variables consumption, prices and payroll - income proxy)

are in line with previous studies undertaken both in Brazil and
abroad [1,4,10,24e26]. 4. Results and discussion
2. The “price of CNG” variable was not used due to the peculiarities
of CNG (see Section 2) and also because of its relatively minor In this section we set out the results obtained from the appli-
importance in the fuel market for Otto Cycle vehicles (less than cation of the model described in the above section. Tables 1 and 2
5% of the total). set out, respectively, the results of the unit root tests for the
3. The model employs a variable related to income (payroll) rather several variables analyzed and the results of the Cointegration tests
than the fleet size, because the latter, despite being a well- (trace and maximum eigenvalue) amongst the model variables,
known and frequently used indicator, is based on a survey with a significance level of 5%. All the tests and estimates were
taken more than 25 years ago [22] and does not reflect short obtained by means of the E-Views software.
term fluctuations in fuel consumption d in particular for the It can be seen from Table 1 that, with the exception of the price
month of December14 d, which are captured by the payroll of Hydrous Ethanol, it is not possible to reject the hypothesis of the
variable. In addition, monthly payroll data is the result of sound existence of a unit root in any of the series. Table 2, in turn, indicates
surveys regularly updated by IBGE. Therefore, they are more
adequate to the purposes of the model than an estimation of the Table 2
fleet size. Results of the Johansen Cointegration test (equation (1)). Trace Test and Maximum
Eigenvalue Test.
4. Brazilian income levels are considerably lower than those in
developed countries, a fact that implies comparatively higher Unrestricted Cointegration Rank Test (trace)
income-elasticity of Gasoline C in Brazil. Consequently, our Hypothesized Eigenvalue Trace 0.05 critical Prob.**
analysis had to take into account such characteristic. no. of CE(s) statistic value
5. Instrumental variables were not used in the model because our None* 0.141052 29.11256 24.27596 0.0114
main objective was to assess the behavior over time of the cross- At most 1 0.063527 10.41079 12.32090 0.1024
price elasticity between Hydrous Ethanol and Gasoline C, as well At most 2 0.018826 2.337681 4.129906 0.1491
Trace test indicates 1 co-integrating eqn(s) at the 0.05 level
as its impact on the consumption of Gasoline C. Instrumental
variables would probably explain consumption changes but not Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
the evolution of the cross-price elasticity. Hence our decision to Hypothesized Eigenvalue Max-Eigen 0.05 Critical Prob.**
use the TVP-ECM approach. No. of CE(s) Statistic Value
6. The effects of the global fuels market price variations are present None* 0.141052 18.70177 17.79730 0.0365
in the prices of Gasoline, Hydrous Ethanol and also sugar. In At most 1 0.063527 8.073109 11.22480 0.1698
At most 2 0.018826 2.337681 4.129906 0.1491
Max-eigenvalue test indicates 1 co-integrating eqn(s) at the 0.05 level
As mentioned before, the December monthly payroll is strongly affected by the *Denotes rejection of the hypothesis at the 0.05 level.**MacKinnoneHaugeMichelis
so-called 13th salary. p-values.
J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705 703

Table 3 Table 4
Long term elasticities (equation (1)). Short term elasticities (equation (1)).

Cgct b5 Substt1 Massat1 DCgct1 DSubstt1 DMassat1 b1 a

1.00000 3.237168 0.93460 0.71599 0.73264 0.05366 0.34465 0.00829 0.02551
[5.31479] [6.87059] [6.69693] [0.40764] [3.27951] [1.44883] [0.29576]

Note: The numbers in square brackets correspond to the t-statistics of the estimated Note: The numbers in square brackets correspond to the t-statistics of the estimated
parameters. parameters.

that there is only one Cointegration vector between the model months. The structural break in January 2010 is a consequence of
variables; in other words, there is a relation of long term equilib- Flex-Fuel vehicles. Without them the unavailability of Hydrous
rium between the variables Subset (price of Hydrous Ethanol/ Ethanol during this period would not have caused a structural
Gasoline C), real monthly payroll and the consumption of Gasoline break in Gasoline C consumption. In fact, if vehicles were not Flex-
C. This means that it is appropriate to use the Ordinary Least Fuel, but rather powered only by Hydrous Ethanol, its shortage
Squares Method (OLS) to estimate the parameters of equations (1) would have caused a fuel crisis d as occurred in the late 1980s early
and (2). 1990s d and not a structural break.
Tables 3 and 4 set out, respectively, the long and short term In order to analyze the influence of the introduction of Flex-Fuel
parameters we estimated for equation (1). vehicles, we applied to these parameters changes a methodology
The results of the estimated long and short term parameters proposed by Hall (1993) [14]; based on the Kalman Filter [18].
were as expected. They were also statistically significant. The long We set out the results of the application of the Hall methodology
term price-elasticity of the Substt variable was positive and almost in Fig. 6, which demonstrates the evolution of the long term
equal to 1, which means that an increase in the price ratio of Hy- parameter of the Subst (price of Hydrous Ethanol/price of Gasoline
drous Ethanol to Gasoline C leads to an almost equivalent increase C) brought about by the introduction of Flex-Fuel vehicles into the
in the consumption of Gasoline C. Similarly, the coefficient of the Brazilian fleet of light passenger and cargo vehicles. It can be seen
Real Monthly Payroll variable indicates that changes in this variable that there were significant variations in the magnitude of the
affect the consumption of Gasoline C in the same direction, albeit parameter, particularly from 2010 onwards. We observe from Fig. 4
with less intensity than the changes in price-elasticity. that the estimated Flex-Fuel fleet for this year was 45% of the Total
The adjustment coefficient between long and short terms was Fleet and with a trend towards increase. In other words, the impact
relatively small, indicating a slow adjustment between short and of Flex-Fuel vehicles on the consumption of Gasoline C is increas-
long term parameters. This result may be a reflection of the long ingly significant.
term fuel price policy adopted in Brazil which restricts price vari- The final value of the long term parameter of the Subst variable
ation on fuel prices (particularly for fuels derived from petroleum was 2.77, which is three times higher than the estimated value for
and natural gas) to minor adjustments, even in the face of major July 2001 to December 2011. In April 2011, the value of the
oscillation on the international market, especially since 2007. The parameter reached approximately 4.00, probably due to the lack of
aim of this policy, as stated above, is to protect domestic consumers Hydrous Ethanol on the market for Flex-Fuel vehicles. It is therefore
from the effects of international volatility and its potentially infla- reasonable to conclude that Flex-Fuel vehicles, which use tech-
tionary effects. nology that enables the consumer to take advantage of the price
It is possible to perceive, in the results of the Granger Causality ratio of Hydrous Ethanol and Gasoline C, have a significant impact
Tests [27] set out in Table 5, a bi-directional influence between real on the Brazilian fuels market.
monthly payroll and the consumption of Gasoline C. In other words, In order to check the quality of the projections of the model we
these two Granger variables cause each other, as might be expected. carried out a projection for the JanuaryeDecember 2012 period on
On the other hand neither the price of Hydrous Ethanol nor the the basis of the adjustment of the model using data from July 2001
price of Gasoline C is Granger caused by an increase in the real to December 2011. We used the MAPE (Mean Absolute Percentage
monthly payroll or by the volume of Gasoline C. The explanation for Error) metric to measure deviations between the projected values
this may be the influence of the reduced offer of Hydrous Ethanol, and those actually observed. The result was a value of 4.80%.
due to the shift of the use of Sugar-Cane to the production of sugar, In order to further gauge the reliability of the findings of this
the export price of which rose 109% (2008e11) in relation to the study, we examined MAPE data from other relevant research
comparable average prices between 2008 and 2011 (source: contained in specialist literature, so as to compare such data with
MAPA). our MAPE reading of 4.80%. We did not find, in the literature, any
It can be seen from Fig. 1, in Section 2 that the consumption of
Gasoline C between December 2009 and December 2011 increased
by around 36%. This suggests possible variation in the estimated Table 5
parameters for the equation which describes consumption of Gas- Granger causality (equation (1)).
oline C. We analyzed this possible structural break by applying a Excluded Chi-sq df Prob.
Chow test [6], taking January 2010 as the reference month.15
Dependent variable: D(LGASOLINAC)
As can be seen in Table 6, the Chow test indicated a rejection of
D(LSUBST) 1.090773 2 0.5796
the null hypothesis of non-existence of a structural break for the D(LMASSASALARIALREAL) 18.31809 2 0.0001
month of January 2010. Nevertheless, in order to see whether there All 18.92651 4 0.0008
were structural breaks for other periods we set Chow Tests for Dependent variable: D(LSUBST)
January 2008 and January 2009. The results showed non rejection of D(LGASOLINAC) 4.978490 2 0.0830
D(LMASSASALARIALREAL) 2.130855 2 0.3446
the null hypothesis of non-existence of a structural break for these All 6.192854 4 0.1852
Dependent variable: D(LMASSASALARIALREAL)
D(LGASOLINAC) 32.61838 2 0.0000
15 D(LSUBST) 1.135263 2 0.5669
We chose January 2010 on the basis of our observation of the consumption of
All 32.80019 4 0.0000
Gasoline C series, set out in graph 1.
704 J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705

Table 6 consumers have to make this calculation by themselves at the time

Chow breakpoint test e consumption of gasoline C e January 2010. of purchase.
Chow breakpoint test: 2010M01 The results obtained show the impact on the Brazilian market of
F-statistic 11.37733 Prob. F(5,116) 0.0000
the penetration of Flex-Fuel vehicles, which reached a rate of
Log likelihood ratio 50.27979 Prob. Chi-Square(5) 0.0000 around 40% by the end of 2009, as observed in Fig. 4. This impact
Wald Statistic 56.88665 Prob. Chi-Square(5) 0.0000 can be quantitatively evaluated by the variation of the long term
coefficient for relative prices between Ethanol and Gasoline C,
which had a final value of 2.77, i.e., three times higher than the
projection accuracy metric for the fuel segment and we therefore estimated value for July 2001 to December 2011. We consider the
analyzed studies on other segments, especially the electricity probable reasons for this variation to be: (1) a shortage of Hydrous
sector. We noted, in particular, the following studies: Li (2013) [19] Ethanol due to adverse climatic events affecting Sugar-Cane pro-
proposed a model for the projection of electricity consumption in duction; (2) the greater demand for Sugar on the international
the North-Eastern Region of the United States and obtained a market, further reducing the availability of Sugar-Cane for Ethanol
MAPE of 5.60% for the winter season, which was in fact lower than production; (3) economic-financial problems encountered by
the MAPE he obtained in projections for other seasons. Conejo Ethanol producers; and (4) the loss of the competitiveness of Hy-
(2005) [9] undertook a similar study in Spain, obtaining a 4.78% drous Ethanol against Gasoline C (the price of which remained
MAPE for the winter season (which, again, was lower than the relatively stable, particularly when compared with the sharp in-
MAPE of other seasons) and Lora (2007) [20], again examining creases in the price of Hydrous Ethanol in recent years). These
electricity consumption in Spain, obtained a MAPE of 8.45%. The problems, which affect the availability of Hydrous Ethanol, are of
aim of these comparisons is to show that MAPEs obtained in other increasing relevance given the growth of the proportion of Flex-
studies are higher than that have found. Thus, we consider our Fuel vehicles in the fleet of passenger and light commercial
model's MAPE of 4.80% to be a positive indicator of its forecasting vehicles.
reliability. In Section 2 we provided details on the possible causes for the
variation of the long term coefficient for relative prices between
Ethanol and Gasoline C, concerning explanations (1) and (2) above.
5. Conclusions As for the economic-financial problems mentioned in (3), the major
culprit is the international economic crisis flared up in 2008 that
Our aim in this study was to evaluate the impact of the intro- led to an increase in interest rates and lower availability of bank
duction and evolution of Flex-Fuel vehicles on the consumption of credit lines. This credit squeeze created financial difficulties for
fuels in Brazil. We conclude, from the results obtained that there several economic groups and particularly for businesses d such as
has been a significant impact on the demand for Hydrous Ethanol the Brazilian sugar and ethanol industry d that had taken on an
and Gasoline C. This is mainly due to the fact that Flex-Fuel vehicles amount of debt disproportional to their assets, in an attempt to
enable the consumer to choose which fuel to buy and that, in most accelerate an increase in production and boost their market share.
cases, the consumer will base this decision on comparative cost- In the case of sugar cane, price forecasts had been influenced by the
benefit considerations. In some (limited) areas of the country it is positive returns from the 2005-6 and 2006-7 harvests, which gave
a common practice to use posters to publicize the price relationship rise to very optimistic and somewhat unrealistic expectations as to
between Hydrous Ethanol and Gasoline C. However, in most places the near future [8].

Fig. 6. Variation of the Subst variable (sv1) in the sample period of July 2001 to December 2011 and the interval of two mean square errors (rmse) of the coefficient (sv1).
J.M.A. Gomez, L.F.L. Legey / Energy 81 (2015) 696e705 705

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