Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of Flexible-Fuel Technology

Energy Journal, 32(3), pp. 119-148

33 Pages Posted: 6 Dec 2007 Last revised: 14 Jun 2018

See all articles by Alberto Salvo

Alberto Salvo

National University of Singapore (NUS) - Department of Economics

Cristian Huse

Stockholm School of Economics; Swedish House of Finance

Date Written: 2011

Abstract

Brazil is the only sizable economy to date to have developed a home-grown ubiquitously-retailed alternative to fossil fuels in light road transportation: ethanol from sugar cane. Perhaps unsurprisingly, the uptake of flexible-fuel vehicles (FFVs) has been tremendous. Five years after their introduction, FFVs accounted for 90% of new car sales and 30% of the circulating car stock. We provide a stylized model of the sugar/ethanol industry which incorporates substitution by consumers, across ethanol and gasoline at the pump, and substitution by producers, across domestic regional and export markets for ethanol and sugar. We argue that the model stands up well to the empirical co-movement in prices at the pump in a panel of Brazilian states. The paper offers a case study of how agricultural and energy markets link up at the very micro level.

Keywords: Biofuels, ethanol, gasoline, sugar, flexible-fuel vehicles, price convergence, arbitrage, co-movement, regime-switch, agrienergy

JEL Classification: F10, L10, Q11, Q42

Suggested Citation

Salvo, Alberto and Huse, Cristian, Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of Flexible-Fuel Technology (2011). Energy Journal, 32(3), pp. 119-148. Available at SSRN: https://ssrn.com/abstract=1039141 or http://dx.doi.org/10.2139/ssrn.1039141

Alberto Salvo (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

Cristian Huse

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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