Fuel Demand Elasticities in Brazil: A Panel Data Analysis with Instrumental Variables

Frederico Uchôa, Cleiton Silva de Jesus, Leonardo Chaves Borges Cardoso

Abstract


The aim of this paper is to provide demand elasticities for the three main fuels used in Brazil: gasoline, ethanol and diesel. We used a panel data approach at municipal level for the period between 2007 and 2016. The innovation in this study is in its introduction of a new instrumental variable for prices, combining three taxes and municipal distance from state capital. The main results are as follows: i) the gasoline, ethanol and diesel demands are price elastic, meaning that all own-price elasticities are greater than one; ii) ethanol consumption is more elastic when the CNG price is added as an explanatory variable, but this does not apply to gasoline; iii) an increase in GDP positively affects the demand for gasoline and diesel (less than proportionally), but does not affect demand for ethanol; iv) fleet size impacts the consumption of all fuels, except when the CNG price is excluded from the ethanol model; v) the ethanol-to-gasoline price ratio is a relevant variable for the demand of both gasoline and ethanol.

Keywords: Fuel demand, Causal inference, Panel data analysis, price elasticity, cross price elasticity.

JEL Classifications: C13, C26, L11, Q41, Q2.

DOI: https://doi.org/10.32479/ijeep.8787


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