When is pure ethanol attractive as a fuel option? Quantifying the gasoline vs ethanol dilemma faced by consumers in Brazil.

Author:Filho, Antonio Carlos da Silva
Position:Report
 
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  1. INTRODUCTION

    Ethanol fuel is considered by many as a cost-efficient, technologically-mature fuel which can act as a development driver in rural areas, as well as a step forward towards more sustainable, less carbon- intensive transport (Goldemberg, 2007). However, economic ethanol adoption puts it in competition with fossil alternatives. As a low blend ethanol competes with other fuel oxygenates such as methyl tert-butyl ether (MTBE) and ethyl tert-butyl ether (ETBE), while as a high blend it competes directly with reformulated gasoline at tank stations. Ethanol needs to be an economic option as to lead consumers and companies to choose it instead of fossil fuels. As such, its price-attractiveness is paramount to the success of green transport policies which make use of the contribution of biofuels.

    In the case of Brazil, ethanol fuel is sold in two main forms: as a low blend with gasoline (which varies between 18 to 25% in volume) and in a pure version (E100). The scope of this paper is focused on the later (E100), as due to the existence of a large flex-fuel fleet, effectively allow consumers to choose their fuel--either ethanol or gasoline--based on their specific preferences.

    While other preferences might exist, previous research showed that consumers consider prices as the main factor leading to fuel choice (Pacini and Silveira, 2010ab). Given their interchangeable usage in the Brazilian flex-fuel fleet, Ethanol and gasoline can be considered to be substitutes. The fuels are not, however, exactly equivalent per volume. The energy content of a liter of ethanol is roughly 2/3 of that of Gasoline (Savage, 2011). On the other hand, ethanol combustion in conventional otto-cycle engines has a slightly better performance due to higher compression rates (Thuijl et al, 2003). This led to the establishment of an empirically-based "rule of the thumb" adopted broadly in academic literature and by government oversight units consolidating the view that ethanol pays-off until its relative price is roughly 70% of that of Gasoline, for the same volume of fuel (Goetemoeller, 2007; MME, 2009).

    In order to complement qualitative discussions of fuel choice (Pacini and Silveira, 2010a), this paper employs quantitative methods of time-series analysis and forecast by non-linear regressions, doing so with a combination of statistical, mathematical and computational tools consolidated in the field of applied social sciences, which can yield more precise results in forecast models (Zou and Yang, 2004).

    The transport fuel market is driven by a highly fragmented demand made of individual consumer choices for fuel. With enough systemic information about the fuel market, a mathematical approach might be desirable, as the derived equations can model a pattern of present and near-future choice of fuel by consumers faced with shifting price signals. Models are also desired due to information asymmetries which are inherent of real-life problems. In the lack of full information, such as environmental preferences, individual incomes and price sensitivities, it becomes difficult to construct equations which fully explain the behavior of the many variables of forecast interest (i.e. the consumer choices). In the absence of full information to generate equations, prices and demand serve as an information proxy for a model-based approach (De Veaux et al., 1998).

    Quantitative forecast models are based on historical data in order to yield patterns of behavior and estimate their trends into their future. These models apply mathematical and statistical...

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