Accepted Manuscript

Demand of automotive fuels in Brazil: Underlying energy demand

trend and asymmetric price response

Niágara Rodrigues, Luciano Losekann, Getulio Silveira Filho

PII: S0140-9883(18)30250-0
DOI: doi:10.1016/j.eneco.2018.07.005
Reference: ENEECO 4083
To appear in: Energy Economics
Received date: 27 December 2017
Revised date: 28 June 2018
Accepted date: 1 July 2018

Please cite this article as: Niágara Rodrigues, Luciano Losekann, Getulio Silveira Filho ,
Demand of automotive fuels in Brazil: Underlying energy demand trend and asymmetric
price response. Eneeco (2018), doi:10.1016/j.eneco.2018.07.005

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 ACCEPTED MANUSCRIPT

Demand of automotive fuels in Brazil: Underlying energy demand trend and

asymmetric price response
Niágara Rodriguesa, Luciano Losekannb, Getulio Silveira Filhoc
a
Energy Economics Group, Fluminense Federal University, Brazil
b
Energy Economics Group, Fluminense Federal University, Brazil
c
Federal University of Rio de Janeiro, Brazil

ABSTRACT
This paper analyzes the role of Asymmetric Price Response (APR) and Underlying
Energy Demand Trend (UEDT) in the Brazilian automotive fuel demand from June

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2001 to December 2016. The demand functions of automotive gasoline, ethanol and
compressed natural gas (CNG) were estimated by employing the autoregressive
distributed lag (ARDL) model and Harvey’s Structural Time Series Model (STSM).

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The importance of considering a more flexible approach incorporating both UEDT and
APR was confirmed by the data. We identified that consumer response to changes in

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price is not linear. The model also inferred a high substitutability between gasoline and
ethanol. Both in the short and the long term, demand for ethanol is more price elastic
than demand for gasoline. Empirical analysis suggests that the decision to refuel a
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vehicle with CNG is not influenced by price variations in ethanol, which indicates that
competition only occurs between CNG and gasoline. Therefore, the inclusion of UEDT
and APR provides more precise information on the effect of price and income changes
on automotive fuel demand. Such information is relevant for establishing public
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policies, as refinery expansion plannning and CO2 emission mitigation.

KEYWORDS: Energy Demand, Gasoline, Ethanol, Compressed Natural Gas,

Underlying Energy Demand Trend (UEDT), Asymmetric Price Responses (APR)
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JEL CLASSIFICATION: C22, C51, C52, Q41

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1. Introduction

In recent years, energy demand for road transportation strongly increased in

Brazil, from 29 million toe1 in 2000 to 77 million toe in 2016 (EPE, 2017). Concerning
the lightweight vehicle segment, Brazil is unique in the world because a significant
portion of its fleet is able to use fuel alternatives to oil products. These alternatives
include anhydrous, hydrous ethanol2 and, to a lesser extent, compressed natural gas
(CNG). The consumption of alternative fuels has significantly increased in the last 15

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years. Their share on lightweight vehicle fuel consumption3 increased from 31% to 39%
from 2000 to 2016 (EPE, 2017).

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However, automotive fuel consumption per capita in Brazil is still much lower

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than that observed in mature economies, especially in comparison with large countries,
such as the United States and Canada. As a comparison, in 2014 the consumption of
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automotive fuels in the United States was 2.0 toe/per capita, while in Brazil it was 0.4
toe/per capita (IEA, 2017). This indicates a potential growth as Brazil retakes its
economy and social development.
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High automotive fuel consumption growth can be divided in two periods. In the
first period (between 2000 and 2007), favorable domestic and global economic
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conditions, such as low interest rates, credit expansion, and real income increase, drove
fuel consumption.
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In the second period (from 2008 until now), the global economic and financial
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crisis hit the Brazilian market and caused an economic slowdown. During this period,
the demand for automotive fuels kept a significant growth rate of 4% per year, while the
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real Gross Domestic Product (GDP) grew at 2% per year from 2009 to 2016. The
decoupling of GDP growth rate and fuel consumption can be explained by anti-crisis
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measures adopted by the Federal Government, especially: i) the IPI4 reduction in the

1
Tonne of oil equivalent.
2
Vehicles in Brazil use two categories of ethanol: hydrous and anhydrous. The hydrous one is used
directly in engines developed for this purpose or in bi-fuel engines. The anhydrous one is mixed with
gasoline according to current legislation.
3
Gasoline C, hydrous ethanol and CNG included.
4
IPI stands for tax on manufactured products, for its acronym in Portuguese. The Federal Government, by
Provisional Presidential Decree no. 451/08, reduced the IPI for zero kilometer vehicles. Reduction in IPI
was to all vehicles with 1,000 piston displacements - from 7% to 0%. In relation to vehicles with 1,000-
2,000 piston displacements, IPI for half of them reduced from 13% to 6.5% (gasoline-powered vehicles)
and from 11% to 5.5% (ethanol and flex-fuel powered vehicles) (Brasil, 2008).
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automobile sector in 2008, 2009 and 2012, which boosted car sales5; and ii) the policy
of keeping domestic gasoline prices below parity prices on the international market, in
order to reduce inflation rates.
These measures stimulated the demand for individual transportation services,
worsening traffic jams in large cities and causing a significant change of supply
conditions in the Brazilian fuel market. The refinery capacity did not follow the fuel
consumption. In 2012, gasoline A6 imports reached a record of 4 billion liters (ANP,
2017), which represents 10% of gasoline C7 consumed, and ethanol reached 1 million

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m3 in 2015, which is 5% of ethanol consumption (EPE, 2017).
A relevant trend in the Brazilian fuel market is the increasing competition

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between hydrous ethanol and gasoline C. The expansion of the flex fuel fleet is driving

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this competition, which also increases the volatility of gasoline C. This presents a
challenge for the refining segment, which is forced to demand greater operational
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flexibility from its existing infrastructure to match production mix with demand.
In Brazil, the development of the gasoline and CNG market is intrinsically related
to the performance of Petrobras. The expansion of refining capacity depends on the
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investment strategy employed by Petrobras, which accounts for 98% of Brazilian total
refining capacity (ANP, 2016) and owns 35% of fuel sales with BR Distribuidora8 — a
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subsidiary of Petrobras (Sindicom, 2016). Meanwhile, Petrobras is facing a serious

financial and political crisis due to its price stability policy for oil byproducts9 in
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refineries, corruption issues10 and, more recentently, the fall of oil prices These events
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led Petrobras to optimize the project portfolio and launch an asset sales program.
A detailed understanding of the factors that affect automotive fuel consumption,
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such as income, prices, fleet, lifestyle, and energy efficiency, is very relevant for
planning the expansion of refineries, as well as to set the Brazilian energy and
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environmental policy. Transport segment is a very important focus on the challenge of

reducing CO2 and other greenhouse gas (GHG) emissions.
5
According to data provided by National Federation of Automotive Vehicle Distribution (Fenabrave,
2010), in 2009 more than 3 million vehicles were sold in the domestic market, which represented an
increase of 11.35% in sales compared to 2008.
6
Gasoline A is sold in refineries, without anhydrous ethanol.
7
Gasoline C is sold to final consumers at gas stations, after addition of anhydrous ethanol.
8
Despite the progressive liberalization of prices and distribution and resale margins encouraged new
companies to come into operation, the company has 47% of CNG sales, 48% of diesel, 40% of gasoline
and 35% of hydrous ethanol (Sindicom, 2016).
9
In order to avoid inflation, the Brazilian government, via Petrobras, kept gasoline and diesel prices
below international parity from 2011 to 2014.
10
Evidenced by Operation Carwash by the Federal Police in March 2014.
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The price and income demand sensitivity was intensively studied in Brazil (see
Alves and Bueno, 2003; Iootty et al, 2009; and Santiago et al, 2011). Traditionally,
demand for fuel has been modeled as a function of economic activity and price. In
addition to these traditional factors, however, automotive fuel demand is also affected
by the energy efficiency of vehicles, as fuel is a derived demand.
The empirical treatment of technical progress in energy demand was considered
by a series of papers, either by exogenous processes captured by time trend, called
Underlying Energy Demand Trend (UEDT) (see Hunt et al, 2003a,b; Hunt and

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Ninomiya, 2003; Al-Rabbaie and Hunt, 2006), or by endogenous process captured by
Asymmetric Price Responses (APR) (see Hunt et al, 2000; Gately and Huntington,

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2002; Adeyemi and Hunt, 2007; Atalla and Hunt, 2016), or both approaches (Adeyemi

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et al, 2010; and Adeyemi and Hunt, 2007; Adeyemi and Hunt, 2014). The national
studies (Iootty et al , 2009; Santos, 2013; Gomez and Legey, 2015), which consider the
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replacement of main fuels — gasoline C, hydrous ethanol, and CNG — do not address
the role of energy efficiency in consumption behavior.
In order to supplement the domestic literature, this paper addressed the
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importance of considering UEDT and APR in modeling the demand for automotive
fuel, taking into account the interrelations among alternative fuels that supply
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lightweight vehicles in Brazil. To adequately capture these effects, this work employs
the Structural Time Series Models (STSM) suggested by Harvey (1989, 1997), to model
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the UEDT in a nonlinear way. In addition to this Introduction, the paper is divided into
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6 sections. Section 2 presents the evolution of the fuel matrix in Brazil. Section 3
discusses how energy efficiency and other non-measurable exogenous effects can be
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adequately modeled, as well as presenting a review of the national literature. Section 4

details the methodology and data used in the model, and section 5 shows the estimated
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results. Finally, the last section presents the conclusions and considerations in relation
to public policies.

2. Automotive Fuel Market in Brazil

The automotive fuel market in Brazil has specific characteristics due to the
diversity of fuels available. Since the last decade, this market witnessed relevant
changes in the structure of consumption, usually dominated by traditional fuels, such as

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gasoline and diesel. In this period, biofuels were relevantly introduced. In particular,
ethanol captured a significant portion of the market share. Moreover, the market also
adopted CNG to some degree. Fig. 1 shows the evolution of the automotive fuel market
(gasoline C, hydrous ethanol and CNG).

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Fig. 1. Evolution of the lightweight vehicle fuel market - gasoline C, hydrous ethanol and CNG
(2001-2016)
Source: Prepared by the author, based on (ANP, 2016) and (Abegás, 2017) data
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The use ethanol as an automotive fuel has a long history in Brazil. In 1974, the
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Federal Government launched the National Alcohol Program, a program designed to

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encourage ethanol production and consumption (Proálcool)11 as a response to the first

oil crisis. After a downturn during the 1990s, ethanol has regained relevance due to the
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introduction of flex-fuel engine technology12 in the Brazilian fleet. The commercial

launch of flex-fuel vehicles in 2003 gave the consumer the possibility to choose the fuel
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when filling up the car rather than at the time of purchasing the vehicle. Flex-fuel
vehicles13, which in 2016 corresponded to 94% of license plates in relation to the Otto
cycle (Anfavea, 2016) and 65% of the total fleet (Fig. 2), increased short time
substitution between hydrous ethanol and gasoline C. According to Fig. 1, the reduction

11
Program introduced the hydrous ethanol vehicle in Brazil and established a progressive mixture of
anhydrous ethanol in gasoline. Now, this share represents 27%.
12
The flex-fuel engine technology optimizes combustion regardless of proportion gasoline C-hydrous
ethanol.
13
Ethanol-powered vehicles are no longer produced since 2006; options are now gasoline C and flex-fuel.
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in market share for gasoline C is followed by an increase in the market share for
hydrous ethanol.

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Fig. 2. Evolution of Fleet by Fuel (2001-2016)
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Source: Prepared by the author, based on Anfavea (2016) data.

As ethanol has a lower calorific content, it is advantageous to fill up with ethanol

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when its price is lower than 70%14 of the gasoline price. If the relative price is 70%, we
would have a consumer’s indifference point for both fuels. Fig. 3 shows the price parity
for hydrous ethanol and gasoline C from 2001 to 2016. From 2001 to 2008, the hydrous
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ethanol price remained competitive most of the time, which explains the successful
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diffusion of flex-fuel vehicles. However, after 2009, the relative price of hydrous
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ethanol surpassed 70% several times due to supply problems15.

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14
The exact energy content ratio of hydrous ethanol related to gasoline C is 0.71. This ratio considers a
27% share of anhydrous ethanol on gasoline C.
15
After a period of large investments made in new ethanol production plants, the heavily indebted
sugarcane industry was seriously affected by the global financial crisis of 2008. As a result, it started
facing a situation of serious credit restrictions, both internally and externally. The unfavorable weather,
with excessive rains in 2009, and droughts at the end of 2010 and 2011, has contributed to worsen the
situation. Consequently, the productivity and the amount of sugarcane produced in the following crops
were reduced, thus causing idleness in the processing of the industrial units. Moreover, ethanol
production was affected by the improvement in the remuneration of sugar in the international market.
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Fig. 3. Real Price Parity to Consumer: Hydrous Ethanol and Gasoline C

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Note: Prices deflated by IPCA - Broad Consumer Price Index (January 2001 = 100)
Source: Prepared by the author, based on ANP (2017) data
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Despite the setbacks in ethanol supply, the predominance of flex-fuel vehicles and
the mandates16 for adding anhydrous ethanol to gasoline indicate this fuel will remain
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relevant in the Brazilian energy matrix. Furthermore, ethanol consumption is a

centerpiece of Brazil’s commitment to reducing greenhouse gas emissions17.
Another significant feature in the Brazilian vehicle market was the introduction of
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compressed natural gas (CNG) technology in 1992. In the early 2000s, high oil prices
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and tax incentives increased CNG car conversions. CNG fleet reached 271 thousand
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vehicles in 2006, and with it, expanded CNG consumption (Gasnet, 2012). Between
2001 and 2007, CNG consumption increased by 22% per year. However, uncertainty
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concerning Bolivian gas exports to Brazil18 discouraged the use of natural gas by the
transportation sector. These problems caused the CNG price to increase by almost twice
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the rate as gasoline C between 2007 and 2015. As a result, the CNG market started
decreasing in 2007 (MME, 2007) and continued to do so until 2016, according to
Abegás (2017) data.

16
The content for mixing anhydrous ethanol and gasoline has remained from 20% to 25% since 2000. In
2015 it has been raised to 27%. According to Anfavea (2016), contents greater than 30% can damage the
engine.
17
At COP21 held in Paris, Brazil stipulated the goal of increasing the portion of sustainable bioenergy in
the energy matrix to 18% by 2030, expanding biofuel consumption, including the increasing in ethanol
supply (MRE, 2015).
18
In 2007 Bolivia's gas supply represented 57% of the total gas supply in the Brazilian market (MME,
2007)
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Despite the tax incentives, production of CNG vehicles is not very significant in
Brazil19. Moreover, a Natural Gas Conversion Kit is required to convert consumer
vehicles to CNG. Despite, high conversion costs and a relatively small share of the Otto
cycle fleet (Fig. 2), CNG vehicles20 still account for 1.9 million vehicles, or about 4% in
2016 (IBP, 2016).

3. Review of Literature

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Energy demand has a particularity. It is an indirect demand, because it results
from the use of equipment stock that consumes energy sources. Indeed, automotive fuel

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demand results from the use of the vehicle fleet. Thus, the energy consumption depends

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on the technological level of the equipment stock. Therefore, it is crucial to consider the
technological progress when estimating fuel demand.
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There are many studies that consider technological progress as an endogenous
process that can be represented by asymmetric price responses (APR) and asymmetric
income responses (AIR) (Gately and Huntington, 2002; Adeyemi and Hunt, 2007).
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Another approach considers technological progress as an exogenous process and,

therefore, it can be represented by a nonlinear time trend called Underlying Energy
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Demand Trend (UEDT) (Hunt et al, 2003a, b; Hunt and Ninomiya, 2003; Al-Rabbaie
and Hunt, 2006; Atalla and Hunt, 2016).
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According to the first approach, any technological change that improves energy
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efficiency is endogenous, as it is induced by sustained growth of energy prices. It also

criticizes the use of a simple deterministic trend to model exogenously the technical
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progress. Accordingly, it is unlikely that this trend can adequately capture the
underlying technological evolution by using time series data. This approach applies a
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price segmentation procedure to separate impacts on demand when price reaches a

maximum level (𝑝𝑚𝑎𝑥 ), when an increase occurs before reaching the historical
maximum (𝑝𝑟𝑒𝑐 ), and when the price falls (𝑝𝑐𝑢𝑡 ). It captures any endogenous impact of
technological progress. The argument for decomposing the price variable into
asymmetric components is that increases in energy prices - in particular above 𝑝𝑚𝑎𝑥 -

19
In Brazil, only Fiat Grand Siena Tetrafuel offers CNG prep kit as a factory option.
20
The largest consumption of CNG in Brazil is found in regions where the supply network is numerous,
such as Rio de Janeiro and São Paulo. CNG kit is mainly installed on lightweight vehicles to carry
passengers, such as taxi and Uber.
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induce technical progress and efficiency in terms of energy consumption, and when the
energy price falls, technological advances are not reversed, and thus consumers respond
heterogeneously to price changes in 𝑝𝑚𝑎𝑥 , 𝑝𝑟𝑒𝑐 and 𝑝𝑐𝑢𝑡 .
The other approach considers the technological progress as an exogenous process,
that is, the energy efficiency is not induced by increases in energy price and, therefore,
it should be represented by a time trend. As the deterministic trend does not adequately
capture the technological evolution, Hunt et al (2003a, b) suggest, via the UEDT, the
application of a stochastic trend, which includes not only technical progress. The UEDT

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also allows us to capture other exogenous factors, such as changes in consumer tastes,
traffic jams, road maintenance, vehicle fleet, among other factors that may affect the

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technological progress. A potential problem of this approach is that the UEDT estimated

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in a symmetric price model may only be a proxy for the APR, that is, the technical
progress that was induced by an increase in price will be captured as an exogenous
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effect.
Thus, other studies (Adeyemi et al, 2010; and Adeyemi and Hunt, 2014) combine
both analyses to test whether UEDT plays a role in a model that incorporates a
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symmetric price response, and also if APR plays a role in a model with UEDT. In other
words, we want to find out whether UEDT and APR are substitutes and/or
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complements.
In Brazil, the Federal Government controls oil products prices. This may have
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affected consumers’ experience and their demand sensitivity of oil products in relation
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to changes in prices. Thus, it is important to test the heterogeneity in the gasoline

demand response to price variations at different levels rather than impose this non-linear
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relationship to the data. If the APR is confirmed by data, it means that in the short term,
with fixed vehicle stock, an increase in the fuel price will cause a reduction in
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consumption. In the long term, a larger decrease is expected, because the increase in
price will stimulate more energy-efficient vehicles.
In the international literature, most of the studies that analyzed the transport sector
focused their analysis on the aggregate demand for oil, adding gasoline and diesel
consumption (see, for example, Dimitropoulos et al, 2005 and Broadstock and Hunt,
2010). Broadstock et al (2011) and Broadstock and Papathanasopoulou (2015) studied
the role of APR and UEDT in disaggregated demand models. By employing Structural
Time Series Model (STSM) from 1960 to 2008, Broadstock et al (2011) explains the

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importance of disaggregating the estimated demand for gasoline and diesel oil in the
road transport segment in the United Kingdom. Broadstock and Papathanasopoulou
(2015) explored demand for gasoline in Greece between 1978 and 2008. They found
that the estimated UEDT displaced the gasoline demand curve to the right over the
period analyzed, thus reflecting more use of energy there.
In Brazil, there is an extensive literature on the analysis of determinants of fuel
demand, mainly gasoline C and hydrous ethanol; however, no study has addressed the
importance of modeling the APR. Moreover, they consider the effect of exogenous

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technical progress by including a simple deterministic trend.
Table 1 summarizes the long-term price and income elasticity as well as the

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modeling used in selected papers found in the national literature. Large amplitude for

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the values reported in several studies can be observed. The highest price elasticity of
demand for gasoline (-3.85, in module) was found by Iootty et al (2009) versus the
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lower elasticity (0) estimated by Alves and Bueno (2003). A large variation can also be
observed upon estimating the price elasticity of ethanol and the cross-price elasticity.
We have to mention the negative income elasticity found by Iootty et al (2009) upon
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estimating the CNG, thus indicating that it is an inferior good.

Table 1
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Summary of long term elasticity for determinants of demand by automotive fuels in the national
literature
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Method of Energy Dependent Long-Term Elasticity

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Authors Period
Estimation Efficiency Variable
Pg Phe Pcng R
Deterministic
VECM-Engle &
Alves and Bueno (2003) 1984 – 1999 and Quadratic Gasoline -0.09N 0.23N - 0.12
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Granger (1987)
Trend

Gasoline -3.85 1.50 0.01 1.19

LA-AIDS -
Iootty et al (2009) 1970 – 2005 No
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Johansen (1988) Ethanol 8.10 -3.58 -0.04 0.08

CNG 0.54 -0.62 -0.78 -0.52

Freitas and Kaneko

ARDL-VECM 01.2003 - 07.2010 Time Dummies Ethanol 1.99 -1.80 - 0.00
(2011)

Gasoline -1.19 0.29 0.03 0.52

Santos (2013) ARDL-GMM** 07.2001 - 12.2010 No Ethanol 7.99 -8.47 0.66 3.72
N
CNG 2.16 0.56 -1.03 0.81

Gomez and Legey (2015) TVP-ECM and KF 07.2001 - 12.2011 No Gasoline - 0.93* - 0.72
Source: Prepared by the author.
Note: N refers to the statistically non-significant estimate; VECM - Vector Error Correction Model; LA-
AIDS - Almost Ideal Demand System; ARDL - Autoregressive Distributed Lag; GMM - Generalized
Method of Moments; TVP-ECM - Time Varying Parameter - Error Correction Model and KF - Kalman
Filter; * Relative price elasticity for hydrous ethanol and gasoline C; ** In a panel context combined with
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time series; Pg - price elasticity of gasoline C; Phe - price elasticity of hydrous ethanol; Pcng - price
elasticity of CNG; and R - income elasticity.

4. Methodology

Demands for gasoline C, hydrous ethanol and CNG were estimated by the
Structural Time Series Models (STSM) developed by Harvey (1989, 1997), combined
with the dynamic model called Autoregressive Distributed Lag (ARDL) model,
according to the following specifications:

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𝐴𝑖 (𝐿)𝑒𝑖𝑡 = 𝑈𝐸𝐷𝑇𝑖𝑡 + 𝐵𝑖 (𝐿)𝑝𝑖𝑡 + 𝐶𝑖 (𝐿)𝑦𝑡 + 𝐷𝑖 (𝐿)𝑓𝑘𝑡 + 𝐸𝑖 (𝐿)𝛾𝑖𝑡 + 𝜀𝑡𝑖 (1)

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𝑈𝐸𝐷𝑇𝑖𝑡 =

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𝜇𝑖𝑡 + 𝑖𝑟𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑖𝑛𝑡𝑒𝑟𝑣𝑒𝑛𝑡𝑖𝑜𝑛𝑠𝑖 + 𝑙𝑒𝑣𝑒𝑙 𝑖𝑛𝑡𝑒𝑟𝑣𝑒𝑛𝑡𝑖𝑜𝑛𝑠𝑖 + 𝑠𝑙𝑜𝑝𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑒𝑛𝑡𝑖𝑜𝑛𝑠𝑖
(2)
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𝑖 𝑖
𝜇𝑖𝑡 = 𝜇𝑡−1 + 𝛽𝑡−1 + 𝜂𝑡𝑖 (3)
𝑖
𝛽𝑡𝑖 = 𝛽𝑡−1 + 𝜉𝑡𝑖 (4)
𝐸𝑖 (𝐿)𝛾𝑖𝑡 = 𝜔𝑖𝑡 𝑖 ;
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𝑖 = 𝑔, ℎ𝑒, 𝑐𝑛𝑔 and 𝑘 = 𝑔, 𝑐𝑛𝑔, 𝑓𝑙𝑒𝑥

(5)
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where 𝑒𝑖𝑡 is the consumption of fuel 𝑖 for the transport sector, 𝑔 is gasoline C, ℎ𝑒 is
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hydrous ethanol, and 𝑐𝑛𝑔 is CNG. 𝑦𝑡 is real domestic income, 𝑝𝑖𝑡 is real fuel price 𝑖,
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and 𝑓𝑘𝑡 is estimated lightweight fleet by fuel 𝑘, where 𝑔 is gasoline C fleet, 𝑐𝑛𝑔 is CNG
fleet and 𝑓𝑙𝑒𝑥 is the flex-fuel (gasoline C and hydrous ethanol fleet)21. Component
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𝐴𝑖 (𝐿) is lag operator polynomial 1 − ∅1 𝐿 − ∅2 𝐿2 − … − ∅𝑝 𝐿𝑝 and 𝑝 is lag length; as

well as 𝐵𝑖 (𝐿) = 𝜋0 + 𝜋1 𝐿 + 𝜋2 𝐿2 + … + 𝜋𝑝 𝐿𝑝 ; 𝐶𝑖 (𝐿) = 𝜑0 + 𝜑1 𝐿 + 𝜑2 𝐿2 + … +
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𝜑𝑝 𝐿𝑝 ; 𝐷𝑖 (𝐿) = 𝜏0 + 𝜏1 𝐿 + 𝜏2 𝐿2 + … + 𝜏𝑝 𝐿𝑝 ; and 𝐸𝑖 (𝐿) = 1 + 𝐿 + 𝐿2 + ⋯ + 𝐿12 of

fuel 𝑖. Equation to be estimated consists of Equation (1) with (2), (3), (4) and (5),
considering that all error terms are independent and mutually uncorrelated, where

𝜂𝑡𝑖 ~𝐼𝐼𝐷 (0, 𝜎𝜂2𝑖 ), 𝜉𝑡𝑖 ~𝐼𝐼𝐷 (0, 𝜎𝜉2𝑖 ), 𝜀𝑡𝑖 ~𝐼𝐼𝐷(0, 𝜎𝜀2𝑖 ), and 𝜔𝑡 ~𝐼𝐼𝐷(0, 𝜎𝜔2 ). Equations (3)

and (4) represent the intercept and slope trend, respectively, and equation (5) represents
the seasonality, where 𝛾𝑖𝑡 is the seasonal component. The data set is from July 2001 to
June 2016.
21
In 2005, ethanol, gasoline and CNG vehicles started to be sold, but the tetrafuel models are not
representative and disregarded in the estimation.
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𝐵(1)
By recursively replacing the autoregressive terms in Equation (1) we have ,
𝐴(1)
𝐶(1) 𝐷(1)
and 𝐴(1) that represent price, income and long-term fleet elasticity, respectively.
𝐴(1)

In order to fully include the effect of APR, two asymmetry models were
considered22: Full Asymmetric Response (FAR) and Restricted Asymmetric Response
(RAR). The price decomposition for both models is below:

𝑝𝑖,𝑡 = 𝑝𝑖,𝑚𝑎𝑥,𝑡 + 𝑝𝑖,𝑟𝑒𝑐,𝑡 + 𝑝𝑖,𝑐𝑢𝑡,𝑡 (6)

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𝑝𝑖,𝑡 = 𝑝𝑖,𝑟𝑖𝑠𝑒,𝑡 + 𝑝𝑖,𝑐𝑢𝑡,𝑡 ; where 𝑝𝑖,𝑟𝑖𝑠𝑒,𝑡 = 𝑝𝑖,𝑚𝑎𝑥,𝑡 + 𝑝𝑖,𝑟𝑒𝑐,𝑡 (7)

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where 𝑝𝑖,𝑚𝑎𝑥,𝑡 are the cumulative increases in log of maximum historical prices 𝑖 for

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month 𝑡; 𝑝𝑖,𝑟𝑒𝑐,𝑡 are the cumulative sub-maximum increases in log of prices 𝑖 for month
𝑡, before reaching the historical maximum ; 𝑝𝑖,𝑐𝑢𝑡,𝑡 are the cumulative reductions in the
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logarithm of the fuel price 𝑖 for month 𝑡; and 𝑝𝑖,𝑟𝑖𝑠𝑒,𝑡 is any accumulated increase in the
natural logarithm of the fuel price 𝑖 for month 𝑡.
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By replacing individually Equations (6) and (7) in (1) we have:

𝐴𝑖 (𝐿)𝑒𝑖,𝑡 = 𝑈𝐸𝐷𝑇𝑖,𝑡 + 𝐵𝑖𝑚𝑎𝑥 (𝐿)𝑝𝑖,𝑚𝑎𝑥,𝑡 + 𝐵𝑖𝑟𝑒𝑐 (𝐿)𝑝𝑖,𝑟𝑒𝑐,𝑡 + 𝐵𝑖𝑐𝑢𝑡 (𝐿)𝑝𝑖,𝑐𝑢𝑡,𝑡 + 𝐶𝑖 (𝐿)𝑦𝑡 +

D

𝐷𝑖 (𝐿)𝑓𝑖𝑖,𝑘,𝑡 + 𝐸𝑖 (𝐿)𝛾𝑖,𝑡 + 𝜀𝑖,𝑡 (8)

E

𝐴𝑖 (𝐿)𝑒𝑖,𝑡 =
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𝑈𝐸𝐷𝑇𝑖,𝑡 + 𝐵𝑖𝑟𝑖𝑠𝑒 (𝐿)𝑝𝑖,𝑟𝑖𝑠𝑒,𝑡 + 𝐵𝑖𝑐𝑢𝑡 (𝐿)𝑝𝑖,𝑐𝑢𝑡,𝑡 + 𝐶𝑖 (𝐿)𝑦𝑡 +𝐷𝑖 (𝐿)𝑓𝑘,𝑡 + 𝐸(𝐿)𝛾𝑖,𝑡 + 𝜀𝑖,𝑡
(9)
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𝑝 𝐵𝑖𝑚𝑎𝑥 (1)
where long-run asymmetric price elasticity is obtained by: 𝛽𝑖,𝑚𝑎𝑥 = is elasticity
𝐴𝑖 (1)
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𝑝 𝐵𝑖𝑟𝑒𝑐 (1) 𝑝 𝐵𝑖𝑐𝑢𝑡 (1)

𝑝𝑖,𝑚𝑎𝑥 ; 𝛽𝑖,𝑟𝑒𝑐 = is elasticity 𝑝𝑖,𝑟𝑒𝑐 ; 𝛽𝑖,𝑐𝑢𝑡 = is elasticity 𝑝𝑖,𝑐𝑢𝑡 ; and
𝐴𝑖 (1) 𝐴𝑖 (1)

𝑝 𝐵𝑖𝑟𝑖𝑠𝑒 (1)
𝛽𝑖,𝑟𝑖𝑠𝑒 = is elasticity 𝑝𝑖,𝑟𝑖𝑠𝑒 for fuel 𝑖.
𝐴𝑖 (1)

22
There is a literature (Hunt et al, 2000; Gately and Huntington, 2002; and Adeyemi and Hunt, 2007) that
draws attention to the possible role of the asymmetric income response (RAR) to explain part of the
technical and energy progress in the functions of demand for energy. Variable income was decomposed
as in Equation (8) and (9) and it was included as an explanatory variable in the three estimated demand
functions, but no statistical significance was found at the 10% confidence level.
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𝑝 𝑝 𝑝 𝑝 𝑝
We expect that in long term | 𝛽𝑚𝑎𝑥 | ≥ | 𝛽𝑟𝑒𝑐 | ≥ | 𝛽𝑐𝑢𝑡 |, also |𝛽𝑟𝑖𝑠𝑒 | ≥ |𝛽𝑐𝑢𝑡 |
for all estimated fuel demand functions.
Hyperparameters (𝜎𝜂2𝑖 , 𝜎𝜉2𝑖 , 𝜎𝜔2 𝑖 and 𝜎𝜀2𝑖 ), together with other model parameters,

are estimated by Maximum Likelihood-Ratio, assuming that normality and optimal

forecast estimates 𝛽𝑇 , 𝜇 𝑇 and 𝛾𝑇 are estimated by Kalman Filter. The exact trend
depends on whether the variances 𝜎𝜂2𝑖 e 𝜎𝜉2𝑖 are null or not. Should any 𝜎𝜂2𝑖 and 𝜎𝜉2𝑖 be

other number, except null, we have stochastic trend. Should both be null, we have linear

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trend, as shown by Harvey (1989) and the model reverts to a deterministic linear trend
model.

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In order to test whether UEDT and APR are substitutes or complements and
whether or not to include them in the specification of demand for fuel, we use an

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approach similar to that proposed by Adeyemi et al (2010). The test procedures can be
found in Annex A1. Regarding the asymmetric price response, when statistical
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significance is found for both FAR and RAR the AIC criterion was used to choose the
preferred specification.
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The flex-fuel technology adopted by the vehicle fleet may have changed the fuel
consumption pattern in Brazil. In order to test this assertion, we employed a
methodological extension of STSM, to analyze the impact of flex-fuel vehicle diffusion
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over the consumption pattern for gasoline and hydrous ethanol. This approach allows
E

Time Varying Parameters (TVP) that provide a flexible analysis of price elasticity of
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demand for gasoline and ethanol. The trend component for the TVP model will follow
the same process as the previous one Equation (1). The linear specification for the TVP
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approach with FAR is as follows:

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𝐴𝑖 (𝐿)𝑒𝑖,𝑡 =
𝑈𝐸𝐷𝑇𝑖,𝑡 + 𝜆1𝑖,𝑡 (𝐿)𝑝𝑖,𝑚𝑎𝑥,𝑡 + 𝜆2𝑖,𝑡 (𝐿)𝑝𝑖,𝑟𝑒𝑐,𝑡 + 𝜆3𝑖,𝑡 (𝐿)𝑝𝑖,𝑐𝑢𝑡,𝑡 + 𝐶𝑖 (𝐿)𝑦𝑡 +𝐷𝑖 (𝐿)𝑓𝑘𝑡 + 𝐸(𝐿)𝛾𝑖𝑡 +
𝜀𝑖,𝑡 (10)

where 𝜆𝑛𝑖,𝑡 = 𝜆𝑛𝑖,𝑡−1 + 𝜈𝑖,𝑡 where 𝑛 = 1.2 𝑎𝑛𝑑 3, e 𝜈𝑖,𝑡 is the error term vector of fuel 𝑖
for month 𝑡.
Models (1), (8), (9) and (10), and the diagnostic tests for respective estimates are
implemented in STAMP 8.3 of software OxMetrics 7 (Koopman et al, 2007).

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4.1 Data

Fuel and substitute fuel prices, GDP as a proxy for income23, and vehicle fleet
were used as variables to explain the consumption of automotive fuels. Price and
income were deflated by the Consumer Price Index (IPCA, for its acronym in
Portuguese). Fuel price and sales data are made available by National Petroleum
Agency (ANP, for its acronym in Portuguese). Sales of CNG are disclosed by the
Brazilian Association of Piped Gas Distributors (Abegás, for its acronym in

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Portuguese). Table 2 shows the variables used to estimate the demand for automotive
fuels.

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Table 2
Variables, Units of Measure and Sources
Variable Proxy Unit Source
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Consumption Sales toe ANP and Abegás
Price Average price at gas stations R$/toe ANP
Vehicle fleet Car sales and licensing - Denatran, Anfavea and IBP
IPCA - general -
- % a.m. IBGE
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index (2001.1=100)
Note: The real price is expressed in Real (January 2001). Toe - Ton of oil equivalent.
Source: Prepared by the author.
D

Data provided by National Traffic Department (Denatran, for its acronym in

E

Portuguese) are subject to double counting and its use for fleet evaluation would
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overestimate the true effect over the demand for automotive fuels. Thus, in the absence
of reliable fleet statistics, a scrappage function was applied to vehicle sales data
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published by the National Association of Vehicle Manufacturers (Anfavea, for its

acronym in Portuguese). The scrappage functions were calibrated with Denatran24 data
from Economia e Energia (1999). We follow the methodology proposed by Losekann
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and Vilela (2010)25 to estimate the Brazilian fleet of automobiles and lightweight

23
Household final consumption expenditure is a more appropriate variable to explain automotive fuel
consumption than GDP, but this data is available only on quarterly basis in Brazil. Considering that
household expenditure accounts for 64% of GDP, we believe that GDP is good proxy of household
available income in Brazil.
24
Latest and reliable source that is available on composition and age of fleet.
25
The difference between our estimated fleet and the one calculated by Losekann and Vilela (2010) is the
calibration data of the scrapping function. We adjusted the scrap function to reach data from Denatran of
1997, while Losekann and Vilela (2010) calibrated the curve to reach data from National Household
Sample Survey (PNAD, 1988) of 1988, by the Brazilian Institute of Geography and Statistics (IBGE). We
chose to use the data from Denatran of 1977 because it is more recent than the PNAD data (PNAD,
1988).
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commercial vehicles. The scrappage function used is the Gompertz-type. See Equation
(11):

(𝑎𝑖 +𝑏𝑖 ∗𝑡)

𝑆𝑖𝑡 = 1 − 𝑒 −𝑒 ; 𝑖 = 𝑎𝑢𝑡𝑜𝑚𝑜𝑏𝑖𝑙𝑒 𝑎𝑛𝑑 𝑙𝑖𝑔ℎ𝑡𝑤𝑒𝑖𝑔ℎ𝑡 𝑐𝑜𝑚𝑚𝑒𝑟𝑐𝑖𝑎𝑙
(11)

where 𝑆𝑖𝑡 is the fraction of remaining vehicles type 𝑖, not scrapped yet, age 𝑡; 𝑡 is the

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age of vehicle in years; 𝑎 and 𝑏 are variable parameters according to the type of vehicle,
and they were estimated in 𝑎 = 21.10 and 𝑏 = 0.24 for automobile and 𝑎 = 15.14 and

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𝑏 = 0.21 for lightweight commercial.
Fleet powered by 𝑘 (gasoline, ethanol and flex-fuel) for month 𝑡 is the sum of

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vehicles in the previous months:
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𝐹𝑘𝑡 = ∑ ∑𝑇𝑡=0[𝑆𝑖𝑡 ]𝑉𝑖𝑘𝑡 (12)
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where 𝑉𝑖,𝑘,𝑡 are sales for vehicles type 𝑖, engine type 𝑘, age 𝑡 for its manufacturing year.
In Brazil, the CNG vehicle fleet consists of converted cars by natural gas
conversion. However, reliable and detailed information about this converted fleet is not
D

available, especially regarding the number of annual conversions per model/year and the
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original fuel of the converted vehicles. Therefore, we decided to apply a 1.5% annual
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vehicle depreciation rate26 to sales of CNG cylinders27, which is a proxy for converted
vehicles. In order to apply the survival rate to the CNG vehicle fleet28, all conversions
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assumed the average vehicle was 2.5 years old (Mousinho, 2003). In order to avoid
double counting, vehicles converted to CNG were deducted from their original type of
engine29. The ratios of vehicles gasoline-CNG, ethanol-CNG; gasoline-ethanol-CNG,
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26
Data provided by the National Automotive Component Industry Union (Sindipeças, for its acronym in
Portuguese) for lightweight vehicles.
27
Data provided by the Brazilian Institute of Petroleum, Natural Gas and Biofuels (IBP, for its acronym
in Portuguese).
28
The CNG fleet has been disaggregated into vehicles and lightweight commercial vehicles according to
the percentages of internal vehicle sales by (Anfavea, 2016).
29
The percentage of diesel-CNG vehicles was disregarded, due to their negligible participation in the
fleet.
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and CNG were based on the State of Rio de Janeiro statistics, where 50% of the
Brazilian conversions take place.

5. Results

Table 3 shows the results of the models30 that have passed their respective
statistical tests - serial correlation, heteroscedasticity and prediction failure.

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Table 3
Estimation of Demand for Gasoline C, Hydrous Ethanol and CNG - Preferred Model -

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Restricted Asymmetric Response (RAR)
Variable Gasoline Variable Ethanol Variable CNG
𝑒𝑔,𝑡−3 𝑒ℎ𝑒,𝑡−1 𝑒𝑐𝑛𝑔,𝑡−1

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0.17*** 0.17*** 0.31***
𝑒𝑔,𝑡−4 -0.20*** 𝑒ℎ𝑒,𝑡−3 0.09** 𝑒𝑐𝑛𝑔,𝑡−2 0.24***
𝑦 0.59*** 𝑦 1.32*** 𝑒𝑐𝑛𝑔,𝑡−3 0.26***
𝑝𝑔,𝑟𝑖𝑠𝑒 -0.72*** 𝑝ℎ𝑒,𝑟𝑖𝑠𝑒 -1.68*** 𝑦 0.25***
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𝑝𝑔,𝑐𝑢𝑡 -0.55*** 𝑝ℎ𝑒,𝑐𝑢𝑡 -1.00*** 𝑦𝑡−1 -0.19***
𝑝ℎ𝑒,𝑟𝑖𝑠𝑒,𝑡−1 0.14*** 𝑝𝑔,𝑟𝑖𝑠𝑒 1.86*** 𝑝𝑐𝑛𝑔,𝑟𝑖𝑠𝑒 -0.17***
𝑝ℎ𝑒,𝑐𝑢𝑡 0.35*** 𝑝𝑔,𝑐𝑢𝑡,𝑡−1 0.63** 𝑝𝑔,𝑟𝑖𝑠𝑒 0.31***
𝑝𝑔,𝑐𝑢𝑡 0.13***
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𝐹𝑐𝑛𝑔 0.12***
Hiperp. Hiperp. Hiperp.
Intercept 11.99 x105 Intercept 196.03 x105 Intercept
Slope 0.00 Slope Slope
Sazon. Sazon. 0.14 x105 Sazon.
Irreg. 58.74 x105 Irreg. 4.47 x105 Irreg. 26.98 x105
D

Out03.12**
Out04.5*** Out02.09***
E

Out3.3*** Out06.1*** Out03.03***

Interv. Int10.1*** Interv. Out11.3*** Interv. Out13.6***
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Int11.3*** Out11.4*** Out14.1***

Out11.5***
Out12.12***
Elast. of Lp Elast. of Lp Elast. de Lp Elast. of Lp
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𝑌 0.58 𝑌 1.77 𝑌 0.32

𝑃𝑔,𝑟𝑖𝑠𝑒 -0.70 𝑃ℎ𝑒,𝑟𝑖𝑠𝑒 -2.25 𝑃𝑐𝑛𝑔,𝑟𝑖𝑠𝑒 -0.87
𝑃𝑔,𝑐𝑢𝑡 -0.53 𝑃ℎ𝑒,𝑐𝑢𝑡 -1.34 𝑃𝑐𝑛𝑔,𝑐𝑢𝑡 0.0
𝑃ℎ𝑒,𝑟𝑖𝑠𝑒 0.14 𝑃𝑔,𝑟𝑖𝑠𝑒 2.49 𝑃𝑔,𝑟𝑖𝑠𝑒 1.58
AC

𝑃ℎ𝑒,𝑐𝑢𝑡 0.34 𝑃𝑔,𝑐𝑢𝑡 0.84 𝑃𝑔,𝑐𝑢𝑡 0.67

𝐹𝑐𝑛𝑔 0.60
Local level with
Nature of trend Nature of trend Local level Nature of trend Deterministic
displacement
Quality of Quality of Quality of
adjustment adjustment adjustment
e.p.v 8.04 x104 e.p.v 23.48 x104 e.p.v 2.32 x104
AIC -6.86 AIC -5.75 AIC -8.07
𝑅2 0.99 𝑅2 0.99 𝑅2 0.99
Diagnosis of Diagnosis of Diagnosis of
residual residual residual
Normality 1.14 Normality 4.70 Normality 2.00
H(h) 𝐻(51) = 1.08 H(h) 𝐻(50) = 0.35 H(h) 𝐻(51) = 1.252

30
Estimations of the three functions demand for automotive fuels - gasoline C, hydrous ethanol and CNG
- with full asymmetric response, restricted asymmetric response and symmetric response can be found in
Annex A2.
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r(1) -0.02 r(1) -0.01 r(1) -0.02

DW 2.02 DW 1.98 DW 1.99
Statistics Box-
Box-Ljung 𝑄(4.1) = 1.49 Box-Ljung 𝑄(3.1) = 0.19 𝑄(4.1) = 0.70
Ljung
Auxiliary Auxiliary Auxiliary
residual residual residual
Irregularity 0.29 Irregularity 4.26 Irregularity 0.66
Intercept 0.48 Intercept 0.17
Slope 11.65***
2 2 2 2 2 2
Prev. error 𝜒(𝑓) 𝜒(22) = 34.53* Prev. error 𝜒(𝑓) 𝜒(24) = 17.52 Prev. error 𝜒(𝑓) 𝜒(24) = 21.22
2 2 2
Test 1 RV 𝜒(𝑅) 46.28*** Test 1 RV 𝜒(𝑅) 𝜒(1) = 155.13*** Test 2 F(2.168)= 12***
Test 2 F(2.166)= 8*** Test 2 F(2.163)= 9***
2 2
Test 3 RV 𝜒(𝑅) 𝜒(1) = 11.5 ∗∗∗
Note: *, ** and ***are the significance level at 10%, 5% and 1%, respectively. E.p.v is the variance

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prediction error; AIC is Akaike's information criterion; R2 is the coefficient of determination; 𝑅𝑑2 is the
coefficient of determination based on differences; Normality is the Bowman-Shenton distribution test
2
𝜒(2) ; H(h) is the distribution heteroscedasticity test F (h, h); 𝑟(𝜏) is the self-correction test of the residuals

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2
with lag 𝜏 of distribution 𝑁(0.1/𝑇); DW is the Durbin-Watson statistic; Forecast error 𝜒(𝑓) is the
2
predictive failure test for the last months of the sample, with distribution 𝜒(24) ; 𝑄(𝑝,𝑑) is the Box-Ljung
2
test based on the first 𝑝 autocorrelation of residuals, with distribution 𝜒(𝑑) ; Test 1 is the Likelihood-Ratio

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2 2
(LR) Test of the restriction 𝜎𝜂 = 0 with distribution 𝜒(1) ; Test 2 is the test F of the null hypothesis that
the decomposed prices are statistically the same; and Test 3 is the Likelihood-Ratio (LR) Test with null
hypothesis that the seasonality is deterministic (with time dummies).
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Concerning demand for gasoline C and hydrous ethanol, the Likelihood-Ratio
(LR) Test rejected the null hypothesis that the variance of intercept is equal to zero, so
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the estimated UEDT for gasoline is Local Level Model with drift (𝑆𝑙𝑜𝑝𝑒 ≠ 0,
𝜎𝜉2 = 0; 𝑎𝑛𝑑 𝐼𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡 ≠ 0, 𝜎𝜂2 ≠ 0), and for ethanol is Local Level Model - random walk
D

plus noise (𝑆𝑙𝑜𝑝𝑒 = 0, 𝜎𝜉2 = 0; 𝑎𝑛𝑑 𝐼𝑛𝑡 ≠ 0, 𝜎𝜂2 ≠ 0). Upon estimating the demand for
E

CNG, it was not possible to reject the null hypothesis of UEDT, which is moving
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steadily and constantly over time. Also, the deterministic trend did not show statistical
significance for CNG.
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Fig. 4 and Fig. 5 shows, respectively, the UEDT of demand for gasoline C and
hydrous ethanol, where we can observe that both are clearly nonlinear. According to the
results of Test 1 and Test 2, reported in the lower part of Table 3, UEDT and APR are
AC

complements; therefore, they should be maintained in the estimation. In addition, the

UEDT coefficient under the symmetric price specification is higher than the asymmetric
price model for both gasoline C and hydrous ethanol. This suggests that all technical
progress was effectively captured by the underlying trend in the symmetric price model.
This reinforces the importance of modeling UEDT and APR jointly when estimating
demand for automotive fuel.
Fig. 4 shows that the UEDT of demand for gasoline C has a positive and
increasing trend throughout the period. From 2009, it started affecting the gasoline C

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consumption more sharply, except for the more intense decline in the beginning of 2009
and then again in 2015. In these two periods, Brazil has experienced a strong economic
recession, when consumers make their decisions based on economic factors. On the
other hand, the UEDT positive trend suggests that exogenous factors raised the demand
for gasoline C. The automotive industry is subject of a series of anticyclic
macroeconomic policies in Brazil, as tax reductions and credit incentives. From 2009,
those policies sustained car sales and gasoline consumption during a low GDP growth
period. Traffic jams in urban areas resulting from fleet increase is other explanation for

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positive UEDT.

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D

Fig. 4. Estimated Underlying Gasoline Demand Trend

E

Source: Elaborated by the authors

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The UEDT of demand for hydrous ethanol (Fig. 5) shows a positive trend in the
first half of the period analyzed until mid-2009, then it fell sharply, and resumed its
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growth trajectory in 2013. This suggests that exogenous factors raised the hydrous
ethanol consumption over the first part of the sample and reduced the demand, mainly
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between 2009 and 2013. In this period, sugar cane production fell substantialy in Brazil
and ethanol was imported.

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Fig. 5. Estimated Underlying Hydrous Ethanol Demand Trend
Source: Elaborated by the authors

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Regarding the deterministic seasonality constraint (with seasonal dummies), this
hypothesis was not rejected upon estimating the demand for hydrous ethanol, where
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monthly dummies to capture the seasonal effect on consumption were accommodated.
On the other hand, decisions made for consuming gasoline C and CNG showed
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nonlinear seasonality over time.

Regarding the asymmetric price response, statistical significance was found for
both FAR and RAR in the gasoline demand function, but the RAR model showed the
D

lowest Akaike information criterion (AIC), which makes this specification preferred.
E

Moreover, the asymmetric price elasticity of short - and long - term demand for gasoline
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𝑝 𝑝
C is in line with the initial expectation, |𝛽𝑟𝑖𝑠𝑒 | ≥ |𝛽𝑐𝑢𝑡 |, which makes this result
conceptually and empirically plausible. Estimated cross-price elasticity of ethanol,
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𝑝 𝑝
however, has an inverse relation |𝛽𝑟𝑖𝑠𝑒 | ≤ |𝛽𝑐𝑢𝑡 |. This result can be explained by the
fact that the estimate takes into account the Brazilian average price, and on average the
AC

ethanol price is not competitive, especially since 2010.

The hydrous ethanol price differs in several States due to transport and
distribution costs, unlike the gasoline C price that is more homogeneous throughout the
country. Distance to the production sites is an important determinant of hydrous ethanol
price. The average hydrous ethanol price is higher in States far from production centers
located in Southeast and Center West. As an example, in Northern States price parity
(ethanol price/gasoline price) exceeds 0.70 throughout the period analyzed. When
hydrous ethanol is relatively expensive, demand for gasoline C is less sensitive (0.14) to
variations in hydrous ethanol prices, because filling up with hydrous ethanol at higher
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prices is not rational. Conversely, when hydrous ethanol is relatively inexpensive,

demand for gasoline C more sensitive (0.70) to variation in hydrous ethanol prices. That
is, greater competition between both fuels occurs when hydrous ethanol is less
expensive. Table 3, column 2, shows these results.
Upon estimating demand for hydrous ethanol, the preferred model is also the
RAR and UEDT specification. According to the third column in Table 3, both the price
elasticity of hydrous ethanol and the cross-price elasticity of gasoline C are elastic (with
the exception of the cross-cut price elasticity of gasoline), and they are in agreement

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𝑝 𝑝
with the initial expectation |𝛽𝑟𝑖𝑠𝑒 | ≥ |𝛽𝑐𝑢𝑡 |.

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By comparing the price elasticity and cross-price elasticity of demand for gasoline
C and hydrous ethanol, in Table 3, with the elasticity found in Table 1, we can note that

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they are smaller (in absolute terms) than those observed in previous studies. The long-
term price elasticity of hydrous ethanol inferred by Santos (2013) is 6 times greater than
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the hydrous ethanol price cut elasticity. Further, the elasticity of gasoline C cross-price
by Iootty et al (2009) is 10 times greater than the elasticity of gasoline C cross-price cut.
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This difference can be explained because most of unobserved information on tastes

and/or changes in energy efficiency probably affects the price elasticity in these studies.
We have to mention that the values of elasticity in Table 1 were estimated with different
D

data sources, time, estimation method, and so on, which partially explains the variations
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in the results.
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The effect of the diffusion of flex-fuel vehicles on price elasticity of demand for
gasoline and ethanol is verified by the Time Varying Parameters (TVP)31 approach.
According to Fig. 6 and Fig. 7, the cross-price elasticity of ethanol is smaller and more
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stable from 2001 to 2006, ranging from 0.28 to 0.31, and the price elasticity of ethanol
ranging from -1.40 to - 1.52. The lower sensitivity in this period shows that the hydrous
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ethanol was substituted for gasoline C at the time of car purchase. From 2006 onwards,
the cross-price elasticity increased sharply and began to stabilize in 2010, as well as the
price elasticity of ethanol in Fig. 7. This period coincides with the increase in flex-fuel
vehicle fleet, which made possible to substitute both fuels in the short term, that is, at
the time of filling up.

31
It was not possible to reject the null hypothesis: 𝜎𝑣2 = 0 to 𝑃𝑔,𝑐𝑟𝑒𝑠 , 𝑃𝑔,𝑐𝑜𝑟 , 𝑃ℎ𝑒,𝑐𝑟𝑒𝑠,𝑡−1 of function
demand for gasoline and to 𝑃ℎ𝑒,𝑐𝑜𝑟 , 𝑃𝑔,𝑐𝑟𝑒𝑠 and 𝑃𝑔,𝑐𝑜𝑟,𝑡−1 of function demand for hydrous ethanol.
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Fig. 6. Evolution of Cross-Cut Price Elasticity of Hydrous Ethanol of Demand for Gasoline C in
Short- and Long-Term
Source: Elaborated by the authors
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E D
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Fig. 7. Evolution of Increasing Price Elasticity of Hydrous Ethanol in Short- and Long-Term
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Over Time
Source: Elaborated by the authors

Thus, it is possible to conclude that the larger share of flex-fuel vehicles in the
fleet increased the sensitivity of demand for gasoline C in relation to the hydrous
ethanol price variation. Also, it is responsible for making the demand for hydrous
ethanol more sensitive to the variation of its price. These results are consistent with the
initial assumptions but differ from the results verified by Santos (2013). The author,
upon estimating the demand for gasoline C and hydrous ethanol, found out that there

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were no relevant changes in the estimated elasticity when the flex-fuel vehicles were
introduced in December 2003. Similarly, Santos (2013) identified a reduction in the
price elasticity of gasoline C ranging from -0.399 to -0.393 and the cross-price elasticity
of hydrous ethanol, in relation to gasoline C, ranging from 1.182 to 1.162. These results
were possibly affected by the period analyzed by Santos (2013), between July 2001 and
December 2010, due to a smaller portion of flex-fuel vehicles in relation to gasoline-
powered vehicles.
Regarding the determinants of demand for CNG, the estimated coefficients of

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𝑝 𝑝
asymmetric prices are in accord with the initial expectation, |𝛽𝑐𝑟𝑒𝑠 | ≥ |𝛽𝑐𝑜𝑟 |. The

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model also inferred that the decision to fill up the vehicle with CNG is not influenced
by the ethanol price. However, the consumer is very sensitive to the variations of

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gasoline price (𝑃𝑔,𝑐𝑟𝑒𝑠 ), with elasticity of 1.58 and they are less sensitive to the
variations of 𝑃𝑔,𝑐𝑜𝑟 with elasticity of 0.67. A possible explanation for the high cross-
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price elasticity of gasoline comes from the low capillarity of the CNG filling stations,
which generates long queues and, in order to avoid them, consumers choose to fill up
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with gasoline when price differentials are less significative32.

We must mention that the APR to estimate the demand for CNG found a long-
term income elasticity of 0.32, which classifies CNG as a normal good (demand grows
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when income increases), different from the result found by Iootty et al (2009), who
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classified CNG as inferior good of -0.52 (demand decreases if income increases).

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Unlike the estimation of demand for gasoline and ethanol, the variables income
and CNG fleet are not affected by the multicollinearity problem, which allowed the
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inclusion of these variables upon estimating the CNG. As expected, the fleet is
positively related to the decision to use this fuel, whose elasticity is 0.60.
The results related to this study are quite different from the elasticity calculated in
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other studies on demand for automotive fuel in Brazil. Such discrepancies can be
explained not only by functional choice, but also by the inclusion of APR and UEDT.
In order to check the forecasting accuracy of the model, we used data from July
2001 to June 2016 to project estimations for the period July 2016 - December 2017 an

32
Usually, CNG relative prices are lower than gasoline prices. Once conversion kits are installed, car
owners use CNG most of time. However, supply restrictions can motivate use of gasoline when prices are
not significantly different.
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we compared them with observations for the same period. We used the33 (Mean
Absolute Percentage Error) metric to measure deviations between the projected values
and those actually observed. The MAPE result was 0.19% for gasoline, 0.8% for
ethanol, and 0.93% for CNG. When compared with the literature (Gomez and Legey,
2015; Li et al, 2013), those results indicate that model is well adjusted for out-of-sample
data.

6. Conclusions

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Analyzing the determinants of automotive fuel demand via UEDT offers

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important gains, compared to traditional methods employed to model fuel demand

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elasticity. The inclusion of such approach, combined with the APR, provides more
detailed information on the effect of price changes on demand than if we disregarded it.
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Such information is relevant for establishing public policies.
The volatility of automotive fuel demand, due to price fluctuations, income, fleet
and other unobservable factors, such as energy efficiency, affects the development in
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logistics for fuel refining, distribution and trading. Knowing the determinants of
consumer demand is relevant for policymakers and market players to anticipate future
D

demand fluctuations, in to avoid fuel shortages and associated imports.

The results confirm the importance of adopting a stochastic trend to estimate
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UEDT in the demand function of gasoline C and hydrous ethanol, because a simple
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deterministic trend would be unable to capture the specificities of the underlying

exogenous effects. Thus, its omission may result in tendentious estimates. Only the
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demand for CNG did not accommodate the UEDT, but the technological progress was
endogenously incorporated into the model via restricted APR.
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Some normative implications can be suggested from the evidence found. Energy
savings can be achieved via policies that affect fuel prices and consumers react

33
The mean absolute percentage error (MAPE) is one of the most popular measures of the forecast
accuracy. MAPE is the average of absolute percentage errors (APE). Let 𝐴𝑡 and 𝐹𝑡 denote the actual and
forecast values at data point 𝑡, respectively. Then, MAPE is defined as (Makridakis et al, 1982):
𝑛
1 𝐴𝑡 − 𝐹𝑡
𝑀𝐴𝑃𝐸 = ∑ | | ∗ 100
𝑛 𝐴𝑡
𝑡=1
where 𝑛 is the number of data points.

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heterogeneously to price variations. The UEDT and APR especification is significant to

identify more precisely how those policies would impact fuel consumption.
The positive trajectories of UEDT inferred in the models, are a direct consequence
of the adopted policies. Tax exemptions and fuel price stabilization policies have
increased demand for private transport and expanded the vehicle fleet. Purchasing new
vehicles increased the current fleet and affected vehicle traffic negatively, thus
increasing the fuel consumption.
Therefore, programs to encourage the renewal of the fleet and remove old vehicles

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from the streets (as they are less efficient) are essential to avoid the energy-intensive
trajectory of the transport segment. Stricter rules for manufacturing fuel-efficient

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vehicles and/or incentive to credit for purchasing efficient vehicles, for example, can

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also reduce substantially the use and intensity of energy for fuel consumption. Other
measures and factors that may diversify the energy-intensive lifestyle in Brazil include:
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tax rates to high fuel consumption vehicles; vehicle labeling to reduce the asymmetry of
information on vehicle efficiency; road improvement and conservation; and changes in
the transport matrix, by prioritizing the rail transport.
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Regarding the differences in the asymmetric price responses found in both short-
and long-term dynamics of the three types of fuels (gasoline C, hydrous ethanol and
D

CNG), they are relevant from energy and environmental policy point of view.
We also noted that the increased share of flex-fuel vehicles changed the pattern of
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consumption, by making consumers more sensitive to price changes, which increased

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the competition between both fuels at the time of filling up.

Concerning the determinants of demand for ethanol, it is important to consider
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that ethanol competitiveness varies according to the distance between the production
plants and consumer markets, as well as according to the tax policies in each Brazilian
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State. Therefore, it is interesting to study the determinants of ethanol and gasoline

consumption, taking into account the spatial heterogeneity within a context of
asymmetric price responses and underlying energy demand trend.
The lack of recent data on vehicle usage in Brazil, as kilometers traveled and fuel
consumption patterns, hampers conclusions on the impact of energy efficiency on
demand for the three fuels: gasoline C, hydrous ethanol and CNG. Future research able
to incorporate this limitation via proxies may separate the effect of the evolution related
to the technical and energy efficiency from the other exogenous factors that are captured

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by UEDT, as well as verify whether there is a rebound effect between consumption

intensity and energy efficiency.

Acknowledgments

The authors would like to thank the comments of Helder Queiroz, Antonio Fiorêncio,
José Feres and Miguel Vazquez on a previous version of this paper. We are also grateful

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for the contributions from two anonymous referees.
Niágara Rodrigues thanks the financial support from the Coordination of Improvement

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of Higher Level Personnel (CAPES).

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Annex A1

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Table A 1
Statistical tests

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Unrestricted Lag
ARDL:𝐴(𝐿) = 𝑇𝐼𝐷𝐸 + 𝐵 𝑐𝑟𝑒𝑠 (𝐿)𝑝𝑐𝑟𝑒𝑠 + 𝐵 𝑐𝑜𝑟 (𝐿)𝑝𝑐𝑜𝑟 + 𝐶(𝐿)𝑦 + 𝐷(𝐿)𝑓 + 𝐸(𝐿)𝛾 + 𝜀
Restricted Lag
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ARDL:
Test 1: 𝐻0 : 𝜎𝜂2 = 0 and 𝜎𝜉2 = 0
Test 1.1: 𝐻0 : 𝜎𝜂2 = 0 and 𝜎𝜉2 ≠ 0
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Test 1.2: 𝐻0 : 𝜎𝜂2 ≠ 0 and 𝜎𝜉2 = 0

𝐴(𝐿) = 𝜇 + 𝐵 𝑐𝑟𝑒𝑠 (𝐿)𝑝𝑐𝑟𝑒𝑠 + 𝐵 𝑐𝑜𝑟 (𝐿)𝑝𝑐𝑜𝑟 + 𝐶(𝐿)𝑦 + 𝐷(𝐿)𝑓 + 𝐸(𝐿)𝛾 + 𝜀
Test 2: 𝐻0 : 𝐵 𝑐𝑟𝑒𝑠 (𝐿) = 𝐵 𝑐𝑜𝑟 (𝐿) = 𝐵(𝐿)
𝐴(𝐿) = 𝑈𝐸𝐷𝑇 + 𝐵(L)𝑝 + C(𝐿)y + 𝐷(𝐿)𝑓 + 𝐸(𝐿)𝛾 + 𝜀
D

Test 3: 𝐻0 : 𝜎𝜔2 =0
E

Note: 𝑖, 𝑡 𝑒 𝑘 were omitted for simplification.

Source: Prepared by the author.
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The Likelihood-Ratio (LR) Tests - Test 1, Test 1.1, Test 1.2 and Test 3 are
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according the following specification:

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𝐿𝑅(𝑟) = −2(𝐿𝐿𝑅 − 𝐿𝐿𝐼 )~𝜒𝑟2

(A1)

where 𝐿𝐿𝐼 is the log-likelihood value for the unrestricted model, 𝐿𝐿𝑅 is the log-
likelihood value for the restricted model and 𝑟 is the number of restrictions on
hyperparameters.
The null hypothesis of Test 2 (Test F) is that the coefficients of the decomposed
price terms are equal, so there is no APR. UEDT is maintained in this test. Should the

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null hypothesis be not rejected, UEDT exceeds the APR; otherwise, UEDT and
Asymmetry are complements.
Test F is calculated by applying the following equation:

(𝑅 2 −𝑅 2 )/𝑟
𝐹(𝑟,𝑑𝑓𝐼) = (1−𝑅𝐼 2 )/(𝑛−𝑘)
𝑅
𝐼

(A2)

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where 𝑅𝐼2 is 𝑅 2 of unrestricted model, 𝑅𝑅2 is 𝑅 2 of restricted model, r is the number of
restrictions imposed on the model, and 𝑑𝑓𝐼 (𝑛 − 𝑘) are the degrees of freedom of the

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unrestricted.
When it does not reject the null hypothesis in Test 3, γ is reduced to the

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deterministic seasonal dummy variable model. NU
Annex A2
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Table A2.1
Estimation of Demand for Gasoline C, considering UEDT and Asymmetric Price Response -
APR and RAR - and Symmetric Response (SR)
Variable APR RAR SR
D

𝑒𝑔,𝑡−1 -0.11*
𝑒𝑔,𝑡−2 -0.23*** 0.17***
E

𝑒𝑔,𝑡−3 0.17*** 0.12**

𝑒𝑔,𝑡−4 -0.14** -0.20*** -0.19***
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𝑦 0.70*** 0.59*** 0.67***

𝑝𝑔 -0.61***
𝑝ℎ𝑒,𝑡−1 0.17***
CE

𝑝𝑔,𝑚𝑎𝑥,𝑡−1 -3.14***
𝑝𝑔,𝑟𝑒𝑐 -0.50***
𝑝𝑔,𝑐𝑢𝑡 -0.70***
𝑝ℎ𝑒,𝑟𝑒𝑐,𝑡−1 0.21***
AC

𝑝ℎ𝑒,𝑐𝑢𝑡,𝑡−1 0.19***
𝑝𝑔,𝑟𝑖𝑠𝑒 -0.72***
𝑝𝑔,𝑐𝑢𝑡 -0.55***
𝑝ℎ𝑒,𝑟𝑖𝑠𝑒,𝑡−1 0.14***
𝑝ℎ𝑒,𝑐𝑢𝑡 0.35***
Hyperparameters
Intercept 23.47 x105 11.99 x105 15.84 x105
Slope
Seasonality
Irregularity 45.74 x105 58.74 x105 50.94 x105
Out2003.3***
Int2010.1*** Out2003.3***
Out2010.1***
Intervention Int2010.3*** Int2010.1***
Int2011.3***
Int2015.2*** Int2011.3***
Int2016.2***
Long-Term Elasticity
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𝑌 0.48 0.58 0.54

𝑃𝑔 -0.49
𝑃ℎ𝑒 0.14
𝑃𝑔,𝑚𝑎𝑥 -2.13
𝑃𝑔,𝑟𝑒𝑐 -0.34
𝑃𝑔,𝑐𝑢𝑡 -0.48 -0.53
𝑃ℎ𝑒,𝑚𝑎𝑥 0.00
𝑃ℎ𝑒,𝑟𝑒𝑐 0.00
𝑃ℎ𝑒,𝑐𝑢𝑡 0.12 0.34

𝑃𝑔,𝑟𝑖𝑠𝑒 -0.70
𝑃ℎ𝑒,𝑟𝑖𝑠𝑒 0.14

PT
Local level with
Nature of trend Local level Local level
displacement
Quality of adjustment

RI
e.p.v 8.02 x 104 8.04 x104 7.77 x 104
AIC -6.85 -6.86 -6.90
𝑅2 0.99 0.99 0.99

SC
Diagnosis of residual
Default Error 0.03 0.03 0.03
Normality 1.30 1.14 1.53
H(h) 𝐻(50) = 0.93 𝐻(51) = 1.08 𝐻(51) = 0.97
NU
r(1) -0.01 -0.02 0.04
DW 1.99 2.02 2.07
Box-Ljung Test 𝑄(3.1) = 0.51 𝑄(4.1) = 1.49 𝑄(3.1) =1.75
MA

Auxiliary residual
Normality irregularity 0.22 0.29 1.67
Normality intercept 1.35 0.48 10.08***
Normality slope 11.65***
2 2 2 2
Forecast error 𝜒(𝑓) 𝜒(23) = 24.26 𝜒(22) = 34.53* 𝜒(22) =15.51
D

2 2
Test 1 RV 𝜒(𝑅) 𝜒(1) = 65.99*** 46.28*** 60.87***
F(4.164) =
Test 2 F(2.166)= 8***
E

9.96***
Note: *, ** and ***are the significance level at 10%, 5% and 1%, respectively. FAR is the Full
PT

Asymmetric Response model, RAR is the Restricted Asymmetric Response model, and S is the
Symmetric Model. All models were estimated in STAMP 8.30 (Koopman et al., 2007). E.p.v is the
variance prediction error; AIC is Akaike's information criterion; R 2 is the coefficient of determination; 𝑅𝑑2
is the coefficient of determination based on differences; Normality is the Bowman-Shenton distribution
CE

2
test 𝜒(2) ; H(h) is the distribution heteroscedasticity test F (h, h); 𝑟(𝜏) is the self-correction test of the
2
residuals with lag 𝜏 of distribution 𝑁(0.1/𝑇); DW is the Durbin-Watson statistic; Forecast error 𝜒(𝑓) is
2
the predictive failure test for the last months of the sample, with distribution 𝜒(24) ; 𝑄(𝑝,𝑑) is the Box-
AC

2
Ljung test based on the first 𝑝 autocorrelations of residuals, with distribution 𝜒(𝑑) ; Test 1 is the
2 2
Likelihood-Ratio (LR) Test of the restriction 𝜎𝜂 = 0 with distribution 𝜒(1) ; Test 2 is the test F of the null
hypothesis that the decomposed prices are statistically the same; and Test 3 is the Likelihood-Ratio (LR)
Test with null hypothesis that the seasonality is deterministic (with time dummies).

Table A2.2
Estimation of Demand for Hydrous Ethanol, considering UEDT and Asymmetric Price
Response - APR and RAR - and Symmetric Response (SR)
Variable APR RAR SR
𝑒ℎ𝑒,𝑡−1 0.17*** 0.36***
𝑒ℎ𝑒,𝑡−3 0.09** 0.19**
𝑒ℎ𝑒,𝑡−5 0.09**

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𝑦 1.44*** 1.32*** 1.04***

𝑦𝑡−1 -0.37**
𝑝ℎ𝑒 -0.94***
𝑝𝑔 0.80***
𝑝ℎ𝑒,𝑚𝑎𝑥 -2.01***
𝑝ℎ𝑒,𝑟𝑒𝑐 -1.48***
𝑝ℎ𝑒,𝑐𝑢𝑡 -0.97*** -1.00***
𝑝𝑔,𝑟𝑒𝑐 1.87***
𝑝𝑔,𝑐𝑢𝑡,𝑡−1 0.63**
𝑝ℎ𝑒,𝑟𝑖𝑠𝑒 -1.68***
𝑝𝑔,𝑟𝑖𝑠𝑒 1.86***
Hyperparameters

PT
Intercept 285.78 x105 196.03 x105 29.81 x105
Slope
Seasonality 0.06 x105 0.14 x105 0.22 x105
Irregularity 0.00 4.47 x105 82.80 x105

RI
Out11.2*** Out03.12*** Out03.12***
Out11.4*** Out04.5*** Out04.4***
Int03.12*** Out06.1*** Int06.1***

SC
Intervention
Int04.5*** Out11.3*** Out10.1***
Int06.1*** Out11.4*** Out10.2***
Out11.5*** Out11.3***
Out12.12*** Out11.4***
NU
Int11.9***
Long-Term Elasticity
𝑌 1.44 1.77 1.85
𝑃ℎ𝑒 -2.57
MA

𝑃𝑔 2.20
𝑃ℎ𝑒,𝑚𝑎𝑥 -2.01
𝑃ℎ𝑒,𝑟𝑒𝑐 -1.48
𝑃ℎ𝑒,𝑐𝑢𝑡 -0.97 -1.34
D

𝑃𝑔,𝑚𝑎𝑥
𝑃𝑔,𝑟𝑒𝑐 1.87
E

𝑃𝑔,𝑐𝑢𝑡 0.84
𝑃ℎ𝑒,𝑟𝑖𝑠𝑒 -2.25
PT

𝑃𝑔,𝑟𝑖𝑠𝑒 2.49

Nature of trend Local level Local level Local level

CE

Quality of adjustment
e.p.v 29.69 x 104 23.48 x104 23.35 x 104
AIC -5.56 -5.75 -5.75
𝑅2 0.99 0.99 0.99
AC

Diagnosis of residual
Default Error 0.05 0.05 0.05
Normality 1.47 4.70 0.90
H(h) 𝐻(52) = 0.52 𝐻(50) = 0.35 𝐻(49) = 0.46
r(1) 0.02 -0.01 0.09
DW 1.96 1.98 1.80
Box-Ljung Test 𝑄(3.1) = −0.03 𝑄(3.1) = 0.19 𝑄(3.1) =1.75
Auxiliary residual
Normality irregularity 2.50 4.26 1.96
Normality intercept 2.43 0.17 2.70
2 2 2 2
Forecast error 𝜒(𝑓) 𝜒(24) = 16.15 𝜒(24) = 17.52 𝜒(22) =25.53
2 2 2 2
Test 1 RV 𝜒(𝑅) 𝜒(1) = 395.14*** 𝜒(1) = 155.13*** 𝜒(1) = 40.06***
F(2.163)=
Test 2 F(4.170) = 2.24
8.83***

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2 2 2
Test 3 RV 𝜒(𝑅) 𝜒(1) = 11.5 ∗∗∗ 𝜒(1) = 7***
Note: *, ** and ***are the significance level at 10%, 5% and 1%, respectively. FAR is the Full
Asymmetric Response model, RAR is the Restricted Asymmetric Response model, and S is the
Symmetric Model. All modes were estimated in STAMP 8.30 (Koopman et al, 2007). E.p.v is the
variance prediction error; AIC is Akaike's information criterion; R 2 is the coefficient of determination; 𝑅𝑑2
is the coefficient of determination based on differences; Normality is the Bowman-Shenton distribution
2
test 𝜒(2) ; H(h) is the distribution heteroscedasticity test F (h, h); 𝑟(𝜏) is the self-correction test of the
2
residuals with lag 𝜏 of distribution 𝑁(0.1/𝑇); DW is the Durbin-Watson statistic; Forecast error 𝜒(𝑓) is
2
the predictive failure test for the last months of the sample, with distribution 𝜒(24) ; 𝑄(𝑝,𝑑) is the Box-
2
Ljung test based on the first 𝑝 autocorrelations of residuals, with distribution 𝜒(𝑑) ; Test 1 is the
2 2
Likelihood-Ratio (LR) Test of the restriction 𝜎𝜂 = 0 with distribution 𝜒(1) ; Test 2 is the test F of the null
hypothesis that the decomposed prices are statistically the same; and Test 3 is the Likelihood-Ratio (LR)

PT
Test with null hypothesis that the seasonality is deterministic (with time dummies).

RI
SC
Table A2.3
Estimation of Demand for CNG, considering UEDT and Asymmetric Price Response - APR
and RAR - and Symmetric Response (SR)
NU
Variable APR RAR SR
𝑒𝑐𝑛𝑔,𝑡−1 0.284*** 0.307*** 0.33***
𝑒𝑐𝑛𝑔,𝑡−2 0.231*** 0.239*** 0.24***
𝑒𝑐𝑛𝑔,𝑡−3 0.305*** 0.257*** 0.32***
MA

𝑦 0.259*** 0.249*** 0.20***

𝑦𝑡−1 -0.221*** -0.185*** -0.26***
𝑝𝑐𝑛𝑔 -0.16***
𝑝𝑔 0.18***
𝑝𝑐𝑛𝑔,𝑚𝑎𝑥 -0.219***
D

𝑝𝑐𝑛𝑔,𝑟𝑒𝑐 -0.215***
𝑝𝑔,𝑚𝑎𝑥 0.499*
E

𝑝𝑔,𝑟𝑒𝑐 0.250***
PT

𝑝𝑔,𝑐𝑢𝑡 0.183*** 0.132***

𝑝𝑔𝑛𝑣,𝑟𝑖𝑠𝑒 -0.172***
𝑝𝑔,𝑟𝑖𝑠𝑒 0.31***
𝐹𝑐𝑛𝑔 0.12*** 0.12*** 0.06***
CE

Hyperparameters
Intercept
Slope
AC

Seasonality
Irregularity 29.78 x105 26.98 x105 29.78 x105
Out02.09***
Out02.09***
Out03.03***
Out13.06***
Intervention Out13.6***
Out14.1***
Out14.1***

Long-Term Elasticity
𝑌 0.21 0.32 -0.60
𝑃𝑐𝑛𝑔 -1.54
𝑃𝑔 1.75
𝑃𝑐𝑛𝑔,𝑚𝑎𝑥 -1.21
𝑃𝑐𝑛𝑔,𝑟𝑒𝑐 -1.19
𝑃𝑐𝑛𝑔,𝑐𝑢𝑡 0.00 0.00
𝑃𝑔,𝑚𝑎𝑥 2.77

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𝑃𝑔,𝑟𝑒𝑐 1.39
𝑃𝑔,𝑐𝑢𝑡 1.01 0.67
𝑃𝑐𝑛𝑔,𝑟𝑖𝑠𝑒 -0.87
𝑃𝑔,𝑟𝑖𝑠𝑒 1.58
𝐹𝑐𝑛𝑔 0.66 0.60 0.58
Nature of trend No trend Deterministic trend No trend
Quality of adjustment
e.p.v 2.98 x 104 2.32 x104 8.46 x 104
AIC -7.85 -8.07 -7.99
𝑅2 0.99 0.99 0.99
𝑅𝑑2 0.92 0.94 0.93
Diagnosis of residual
Default Error 0.02 0.01

PT
0.02
Normality 10.02 1.96 10.02
H(h) 𝐻(51) = 1.21 𝐻(51) = 1.25 𝐻(51) = 1.21
r(1) -0.05 -0.02 -0.05

RI
DW 2.04 2.00 2.04
Box-Ljung Test 𝑄(3.1) = 2.52 𝑄(4.1) = 0.70 𝑄(3.1) =1.75
Auxiliary residual

SC
Normality irregularity 17.39*** 0.66 0.81
2 2 2 2
Forecast error 𝜒(𝑓) 𝜒(24) = 15.94 𝜒(24) = 21.22 𝜒(22) =18.29
Test 2 F(4.170) = 5.06*** F(2.168)= 12.31***
NU
Note: *, ** and ***are the significance level at 10%, 5% and 1%, respectively. FAR is the Full
Asymmetric Response model, RAR is the Restricted Asymmetric Response model, and S is the
Symmetric Model. All modes were estimated in STAMP 8.30 (Koopman et al, 2007). E.p.v is the
variance prediction error; AIC is Akaike's information criterion; R 2 is the coefficient of determination; 𝑅𝑑2
is the coefficient of determination based on differences; Normality is the Bowman-Shenton distribution
MA

2
test 𝜒(2) ; H(h) is the distribution heteroscedasticity test F (h, h); 𝑟(𝜏) is the self-correction test of the
2
residuals with lag 𝜏 of distribution 𝑁(0.1/𝑇); DW is the Durbin-Watson statistic; Forecast error 𝜒(𝑓) is
2
the predictive failure test for the last months of the sample, with distribution 𝜒(24) ; 𝑄(𝑝,𝑑) is the Box-
2
Ljung test based on the first 𝑝 autocorrelations of residuals, with distribution 𝜒(𝑑) ; Test 1 is the
D

2 2
Likelihood-Ratio (LR) Test of the restriction 𝜎𝜂 = 0 with distribution 𝜒(1) ; Test 2 is the test F of the null
hypothesis that the decomposed prices are statistically the same; and Test 3is the Likelihood-Ratio (LR)
E

Test with null hypothesis that the seasonality is deterministic (with time dummies).
PT
CE
AC

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Highlights
 Automotive fuel demand shows non linearities and long-term trends in Brazil
 When those features are included, elasticities estimation is more accurate
 Diffusion of flex-fuel vehicles has changed fuel consumption pattern in Brazil
 There is a high substitutability between gasoline and ethanol in Brazil
 Fuel demand elasticities in Brazil are usually overestimated by literature

PT
RI
SC
NU
MA
E D
PT
CE
AC

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