Automotive fuel consumption in Brazil: Applying static and dynamic systems of demand equations

This paper aims to investigate and explain the performance of the Brazilian demand for automotive fuels in the period 1970-2005. It estimates the price and income elasticities for all the available fuels in the automotive sector in the country: gasoline, compressed natural gas (CNG), ethanol and diesel. The analysis of the expenditure allocation process among these fuels is carried out through the estimation of a linear approximation of an Almost Ideal Demand System (AIDS) model. Two estimation methods were implemented: the static (through a seemingly unrelated regression) and a dynamic (through a vector error correction model). Specification tests support the use of the latter. The empirical analysis suggests a high substitutability between gasoline and ethanol; being this relation higher than the one observed between gasoline and CNG. The study shows that gasoline, ethanol and diesel are normal goods, and with the exception of ethanol, they are expenditure elastic. CNG was estimated as an inferior good.