Grupo de Economia da Energia

Flex-fuel vehicles: understanding the choice of fuel

In biofuels, ethanol on 21/03/2011 at 00:31

By Luciano Losekann and Gustavo Rabello de Castro(*)

As previous article, models that allow you to choice fuel, gasoline or ethanol, rule cars for sale in Brazil. Flex-fuel vehicles already represent 46% of the Brazilian light vehicle fleet, whose portion should rise continuously.

Thus, most car owners can choose the fuel they use at the time of fueling. Thus, the demand for gasoline and ethanol becomes more volatile. Although other factors influencing consumer choice, such as autonomy and environmental impact, the relative price of fuels is the predominant criterion of choice.

As can be seen in Figure 1, the evolution of Brazilian ethanol and gasoline C consumption [1] in the last three years was greatly influenced by the relative price of ethanol (price of ethanol /price of gasoline). In times where the relative price is low, the ethanol consumption increases and gasoline consumption decreases. And, when the relative price rises, ethanol consumption decreases and gasoline consumption. The behavior of the market in early 2010 makes it clear. The relative price has risen sharply, causing sales of ethanol fall down and increasing sales of gasoline [2].

Figure 1 – Monthly alcohol and gasoline consumption (thousand m3) and the relative price of fuel – Brazil (2008-2010)

Note: Sales of gasoline and ethanol on the left axis and relative price on the right axis.

Source: ANP

Due to differences in transportation costs and taxation, the price of ethanol is distinguished by state, the same for its price in relation to gasoline. In the states near the producing areas, the relative price favors the choice of ethanol for fuel-flex vehicles. In the Northern states, the relative price is high and the ethanol is less competitive. Figure 2 shows the relative price in Brazilian states in December 2010. At that month, fueling ethanol was very advantageous (relative price below 0.70) in the fuel producing area (Central West, São Paulo and Paraná).

Figure 2 – Relative price (price of ethanol/ price of gasoline) by State – December 2010.

Source: ANP

The volatility for the ethanol consumption and gasoline due to price fluctuations is related to the development of logistics of both fuels. That is, companies and authorities should be able to anticipate demand fluctuations to avoid undersupply, which may eventually requires importing fuel. As the adjustment of supply and demand for ethanol is made via price, this challenge is more relevant to the supply of gasoline, because its policy of price seeks stability.

This article tries to understand the gasoline and ethanol substitution process. To do this, we estimated the portion of fuel consumption which corresponds to flex-fuel vehicles. As gasoline and ethanol car owners can not choose fuel when fueling only a portion of flex-fuel cars corresponds to price fluctuations.

Thus, we removed the portion corresponding to gasoline and ethanol vehicles from the total fuel consumption of each state. That portion was estimated by multiplying the ethanol and gasoline fleet by unit consumption. We call the remaining part, which corresponds to the flex-fuel vehicles, as potential ethanol consumption of the flex-fuel fleet (Figure 3).

Figure 3 – Composition of automotive fuel consumption

We studied the relationship between the actual consumption and potential ethanol consumption of the flex-fuel fleet and relative price of ethanol. Figure 4a shows the data of these two variables in the Brazilian states from Jan/2006 to Dec/2010 [3].

Figure 4a – Actual consumption and ethanol potential ratio for flex-fuel fleet (EC/PC) and relative price of ethanol (PE/PG)

We estimate that this relationship can be described as a logistic function:

CE⁄CP=1⁄((1+exp(-13,35+19,37.PE⁄PG) ) )

Figure 4b – Actual consumption and ethanol potential ratio for flex-fuel fleet (EC/PC) and relative price of ethanol (PE/PG)

From this function and estimates of the fleet it is possible to predict the gasoline and ethanol consumption from the fuel price scenarios. As an illustration, we consider three scenarios for the Brazilian average of relative prices (0.80, 0.70 and 0.60) and estimate the evolution of the monthly ethanol and gasoline consumption in 2012. As ethanol is consumed by almost flex-fuel cars, its demand shows major price fluctuation according to price changing. At high price scenario, the total consumed in 2012 was 14.6 million m3, a value that would reach 35.1 million in the lowest price scenario.

Figure 5 – Estimated monthly ethanol consumption (thousand m3) in 2012 according to relative price scenarios (PE/PG = 0.6, 0.7 and 0.8)

Gasoline vehicles still have great portion in the Brazilian fleet giving lower variation of gasoline consumption between the scenarios. In the scenario of higher relative price of ethanol, gasoline consumption reaches 35.3 million m3 in 2012, and falling to 20.9 million in the scenario of lowest price.

Figure 6 – Estimated monthly gasoline consumption (thousand m3) in 2012 according to relative price scenarios (PE/PG = 0.6, 0.7 and 0.8)

This methodology provides a useful tool to understand the gasoline and ethanol substitution process, and therefore foresee the consumption of these fuels. In recent years, the relative price of ethanol experienced an increasing trend, and most of the time it is near the limit of substitution (0.7) in states with greater consumption. Thus, the oscillations become more evident and its anticipation more relevant to authorities and companies.

[1] Gasoline C is the type of gasoline sold in gas stations, containing 25% ethanol. In this article, the term gasoline will be used as a synonym of gasoline C.

[2] In February 2010, ethanol consumption was 30% lower, and gasoline was 25% higher than in February 2009.

[3] As before this period the flex-fuel fleet was irrelevant, the data are not representative.

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