Price discovery in Brazil: causal relations among prices for crude oil, ethanol, and gasoline

ABSTRACT

Brazil is among the largest producers of ethanol and crude oil. Like other emerging countries, Brazil seeks to keep domestic prices for liquid fuels consistent with the international market. To evaluate Brazil’s policy of pricing petroleum products, price controls to curb inflation, and price liberalization (international parity), we analyze causal relations among domestic prices for hydrated ethanol, gasohol (anhydrous ethanol blended into gasoline), and gasoline, and the crude oil benchmark WTI during four sample periods. Before October 2016, flex-fuel vehicles make hydrated ethanol and gasohol substitutes, which creates a bidirectional causal relation between their prices. This causal relation disappears after October 2016. During this period, WTI and gasoline are the main source of new information for the price of hydrated ethanol.

KEYWORDS:

• Fuel prices
• price discovery
• ethanol
• gasoline
• policies
• Brazil

Acknowledgments

All information presented at this work represents the author’s own opinion based on data disclosed by Petrobras, the Brazilian petroleum regulatory agency, ANP, and the other sources. They do not possess any proprietary information. The authors are responsible for any errors therein. This article was developed during Larissa Nogueira Hallack’s doctoral studies as a research scholar in the Department of Earth and Environment at Boston University under the supervision of Robert Kaufmann. We thank two anonymous referees of Energy Sources, Part B: Economics, Planning, and Policy (ESPB) for helpful comments.

Supplementary Information

●Data

To evaluate the degree to which converting time series to inflation corrected Brazilian Reals affect our results, we repeat the analysis with two other data sets. One observation as reported; nominal values for crude oil, refined products, and Ethanol. Another data set measures all prices in real US dollars to account for changes in the US price levels and international exchange rates. To create these series, we average daily observations for the exchange rate (IPEA, 2018) to create a time series for weekly observations. We use the weekly observations for exchange rates to convert nominal Reals to nominal dollars. Nominal prices are converted to real dollars using a weekly deflator that we interpolate from monthly values of the U.S. Consumer Price Index (CPI) for all items (CUUR0000SA0) obtained from the Bureau of Labor (base year 1982).

●Results

ADF statistics indicate that all of the time series are I(1); in real Reals (Table 1), in nominal values (Supplementary Table 1S) and real US dollars (Supplementary Table 2S).

Of the 36 potential causal relations tested by the four subsamples in the second dataset (Table 3S), 13 strongly (p < 0.05) reject the null hypothesis. Of the 36 potential causal relations tested by the four subsamples in each of the third dataset (Table 3S), 8 strongly (p < 0.05) reject the null hypothesis. These 13 and 8 rejections are greater than the two (0.05*36) rejections (at the 5% significance level) that random chance would generate by repeated testing. Noteworthy, the real Reals data set possesses 17 causal relations that strongly reject the null hypothesis; the largest number among the data sets under analysis. This result evidences that eliminating the effects of inflation and international exchange rates on ethanol, gasohol, and gasoline prices facilitate the price discovery process in Brazil.

Notes

¹ Diesel engines have been used in Brazil in heavy-duty vehicles, such as trucks and buses, as well as in light commercial vehicles, since a ban on diesel passenger vehicles in 1976. In 1994 this restriction changed to a ban on the sale of diesel fuel for use in vehicles with less than 1000 kg payload capacity.

² Brazilian petroleum (oil and condensate) production from the pre-salt layer increases by 1.4 million barrels per day between 2010 and 2018 (ANP, 2018b).

³ This framework makes Brazil the main destination of US ethanol exports, accounting for nearly one-third of all US fuel ethanol exports in 2017 (EIA, US Energy Information Administration 2018c).

⁴ Within the period between July 30, 2017 and December 30, 2017, the 459 municipalities surveyed were distributed in two different groups. The capitals and the Federal District remained surveyed every week. The others 432 municipalities were separated into two different groups that alternated the survey. Due to the alternation of municipalities surveyed, we do not include hydrated ethanol and gasohol prices in the analysis within this period.

⁵ These losses are obtained from Petrobras’ Financial Reports.

⁶ The competitive advantage of hydrated ethanol prices relative to gasohol prices propel ethanol sales and curb motor gasoline ones in 2018. It is observed an increase of 42% in hydrated ethanol sales in 2018 compared to a reduction of 13,1% in gasohol sales because the price ratio between ethanol and gasohol was below 70% from April to December, 2018 (ANP, 2018g).