Short-run, long-run and cross elasticities of gasoline demand in Brazil

Abstract

Gasoline is one of the most important of the oil-derived products. Its importance is closely related to its participation in the value of imports of many countries and in a number of cases, it is one of the determinants of their balance of payment deficit, fiscal deficit and economic growth. As opposed to most nations, Brazil has had a gasoline substitute since 1985: alcohol. Many studies have tried to estimate the income and price elasticities of the demand for gasoline in several countries. This paper extends previous studies by estimating the cross-price elasticity between gasoline and alcohol. Our findings indicate that alcohol is an imperfect substitute for gasoline even in the long-run. As a consequence, the need for a new fuel substitution must be initiated long before petroleum reserves vanish.