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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractAs much of the world goes searching for alternative sources of energy to oil, Brazil's three-decade experience in developing a successful substitute for gasoline merits attention. Brazil is the only sizable economy to date to have developed a ubiquitously distributed alternative to oil-based fuels in road transportation: ethanol from sugarcane. Perhaps unsurprisingly, the uptake of flexible-fuel (dual-fuel) vehicle technology has been tremendous. We provide a stylized model of the vertical sugar industry which incorporates arbitrage by producers, across domestic and export markets for ethanol and sugar, and arbitrage by consumers, across ethanol and gasoline at the pump. We show that the model stands up well to the empirical covariation in prices over 30 years. In particular, owing to the increasing penetration of flexible-fuel vehicles, consumer arbitrage is tying the retail price of ethanol to that of gasoline. Of relevance to the current "food-versus-fuel" debate, the outward shift of the ethanol demand curve, at price levels where traditional gasoline consumers arbitrage, may lead to higher sugar prices, thanks to substitution in demand (gasoline and ethanol) and in supply (sugar and ethanol).

Reduction in local ozone levels in urban São Paulo due to a shift from ethanol to gasoline use

“…Light transportation is a key contributor to air pollution in this gridlocked metropolis [1][2][3] , with large public health implications [4][5][6][7] . In 2011, 40% of the city's 6 million active light-duty vehicles -likely accounting for over one-half of all light vehicle distance traveled -possessed bi-fuel capability.…”

“…We propose that our "model-free" analysis potentially accounts for the interaction between anthropogenic and biogenic emissions and caution that successful strategies against ozone pollution require knowledge of the PRE-PRINT DATE: 18 February, 2014 Ozone levels are relatively high in São Paulo, with hourly concentrations above 75 and 125 g/m 3 , respectively, 2.7 and 5.3 times more likely than for PM10 in our sample. Light transportation is a key contributor to air pollution in this gridlocked metropolis [1][2][3] , with large public health implications [4][5][6][7] . In 2011, 40% of the city's 6 million active light-duty vehicles -likely accounting for over one-half of all light vehicle distance traveled -possessed bi-fuel capability.…”

“…S2 below). 6 To the extent that gasoline prices at the pump varied a little, this reflects the These prices are based on large weekly surveys that were representative of the population of retailers in the city of São Paulo, with a median of 349 retail outlets ("gas stations") sampled per week and a minimum of 261. The surveys also indicate that the availability of both ethanol and gasoline was ubiquitous.…”

Recent Trends in Salmon Price Volatility

“…In addition to increasing prices, the so-called biofuel revolution has created new connections between agriculture and energy markets (Serra et al, 2010;Ciaian & Kancs, 2011;Nazlioglu and Soytas, 2011;Salvo & Huse, 2011). This has directly manifested in a stronger relationship between corn and ethanol prices and, by extension, gasoline (Du & Lu McPhail, 2012).…”

Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol?

“…They may also respond to shifts in the supply of gasoline triggered by refinery outages, to cost shocks associated with shifts in the global price of crude oil, and with shifts in the domestic demand for gasoline driven by the U.S. business cycle or by changes in consumer behavior (see, e.g., Coglianese, Davis, Kilian and Stock 2016). Although there have been many analyses of these markets in isolation, only recently attention has been given to the close economic relationship between energy and agricultural markets (see, e.g., Salvo and Huse 2011;Mallory, Irwin, and Hayes 2012;Baumeister and Kilian 2014;Carter, Rausser and Smith 2016;Bielen, Newell and Pizer 2016).…”