APPLIED ECONOMICS, 2016

VOL. 48, NO. 54, 5300–5313

http://dx.doi.org/10.1080/00036846.2016.1176115

Light fuel demand and public policies in Brazil, 2003–2013

Luciano Rodrigues and Mirian Rumenos Piedade Bacchi
Department of Economics, Administration and Sociology, Escola Superior de Agricultura ‘Luiz de Queiroz’ (ESALQ), University of São Paulo
(USP), Piracicaba, SP, Brazil

ABSTRACT KEYWORDS
The main objective of this article is to evaluate determinants of demand for light fuels in Brazil Demand for transportation;
between 2003 and 2013. Through a vector autoregression analysis, an effort was made to identify public policies; energy
and quantify the impact of different economic variables and public policy measures adopted demand; time series
during this period on the surprising increase in energy consumption by Brazil’s light-vehicle fleet. JEL CLASSIFICATION
The results suggest that demand for energy by the light-vehicle fleet was influenced by an C32; R41; Q41; Q48
increase in income, by a decrease in fuel prices associated with a policy designed to prevent
increases in the price of gasoline from pushing the inflation rate up, by a higher availability of
credit for buying vehicles, and by a drop in the real price of those goods, with emphasis on
countercyclical measures to waive the tax on industrialized products levied on new vehicles
during economic downturns in the automotive industry.

I. Introduction
Understanding the behaviour of energy demand for
private transportation purposes has inspired hun-
dreds of studies over the past 40 years. This issue
has also received special attention from the private
sector and especially from policy-makers, as it is
directly related to discussions and decisions on the
energy security of nations, to greenhouse gas emission
control measures, to the macroeconomic policy
adopted by countries, and to the planning of compa-
nies operating in this sector, among other elements.
In Brazil, in addition to the above-mentioned
reasons, understanding the determinants of demand
for private transportation became more important in
recent years due to the unusual behaviour of con-
sumption of Otto cycle fuels,1 the path and duration
of which had never been seen before in this market
(Figure 1).
Between 2003 and 2013, energy consumption by
the Brazilian light-vehicle fleet more than doubled,
posting an average annual growth rate of 7.3%,
peaking at 10% in 2004 and at 10.1% in 2008. This
growth was significantly higher than the world aver-
age and was similar to that seen in countries such as
India and China, where income increased much
more over this period than in Brazil (EIA, 2015).
A significant growth in demand for light fuels,
combined with a low increase in the domestic supply
of ethanol and gasoline, whose analysis is beyond the
scope of this article, also had consequences for the
Brazilian domestic supply. Brazil, which was self-
sufficient in the production of oil products and an
ethanol exporter, began to import significant
amounts of fuel to meet domestic demand, causing
losses in its trade balance, logistical difficulties for
distributing this fuel and losses to Petrobras,2 which
imported gasoline at a loss to prevent increases in its
price from pushing inflation up.
Given the relevance of the topic, the consequences
associated with this shift in consumption trends, and
questions about the factors that could have stimu-
lated this behaviour, this study aims to evaluate the
determinants of demand for fuels used by the light-
vehicle fleet in Brazil between 2003 and 2013.

CONTACT Luciano Rodrigues lurodrig@usp.br Department of Economics, Administration and Sociology, Escola Superior de Agricultura ‘Luiz de
Queiroz’ (ESALQ), University of São Paulo (USP), Padua Dias, 11 – 13.418-900 Piracicaba, SP, Brazil
1
The term ‘Otto cycle’ refers to the thermodynamic cycle associated with the operation of spark-ignition internal combustion engines. In Brazil, this term is
related to the fleet of motorcycles, cars and light utility vehicles fuelled by ethanol, gasoline or natural gas, which are referred to as light vehicles in this
article. The terms demand for private transportation, Otto cycle demand and demand for light fuels are used as synonyms to designate total fuel
consumption by the light fleet.
2
Petroleo Brasileiro S.A. or Petrobras is a publicly-held company whose majority shareholder is the Brazilian Government. According to ANP (2014), Petrobras’
market share in the Brazilian refining industry exceeds 95%.
© 2016 Informa UK Limited, trading as Taylor & Francis Group

Figure 1. Brazilian light fuel consumption disaggregated by fuel type. Source: ANP (2014), EPE (2014) and ABEGÁS (2014).
Note: figures converted into gasoline equivalents according to the procedure described in the following sections.
Specifically, it is intended to identify the relevance
and contribution of measures adopted by the federal
administration and of economic variables on
demand for Otto-cycle fuels in Brazil during that
period. For this purpose, in addition to a logical
and sequential analysis of the topic, a vector self-
regression model with error correction in its struc-
tural form (structural VEC) was used to quantify the
effect of the different variables identified.
The proposed analysis is justified by a number of
aspects. First, as will be described in the literature
review, there are no studies specifically addressing
this issue in the domestic market.
In addition, Brazil is a unique country in the
world in that it has a significant number of vehicles
and motorcycles in circulation that can use more
than one fuel. In 2013, for example, sales of flex-
fuel vehicles (vehicles that can use hydrous ethanol,
gasoline or any mixture of both) accounted for over
90% of total sales, with 3.17 million units sold
(ANFAVEA, 2014). In addition, there are about 2
million vehicles converted for using natural gas as
fuel as well in the Brazilian market (IBP, 2014). As
will be detailed in other sections of this article, this
feature of the domestic market requires a different
approach for analysing demand for light fuels and is
likely to contribute to increasing the information
available in international databases on the subject.
This article also provides important basic ele-
ments for understanding the impact of new energy-
related and economic public policy measures on
APPLIED ECONOMICS 5301
consumption of fuels in Brazil, providing decision-
makers and other agents in this market with a solid
foundation for future energy scenarios.
Finally, this study offers a contribution to the
development of international knowledge in this
field, as it expands the modelling of the phenom-
enon to include variables other than fuel prices and
income in the analysis of fuel demand, which is
considered a challenge for this kind of studies
according to Ajanovic et al. (2012) and Dahl (2012).
II. Recent developments in fuel demand and its
determinants in the Brazilian market
Several factors may have contributed to the signifi-
cant increase in light fuel consumption in Brazil
since the early 2000s. In the macroeconomic field,
it seems clear that output growth, rising income, and
improvements in its distribution boosted consump-
tion during the period under analysis.
However, this might not be the only variable
accounting for the variations observed in fuel
demand in Brazil, since consumption increased
even during low economic growth periods. In 2009,
for example, while the effects of the global financial
crisis led to a contraction in the Brazilian economy
and to lower fuel consumption in several countries,
the energy consumption of the light-vehicle fleet in
Brazil increased by almost 6%. The same phenom-
enon was observed in 2012, when the GDP growth
5302 L. RODRIGUES AND M. R. P. BACCHI
Figure 2. Annual GDP growth and light fuel consumption in Brazil. Source: ANP (2014), ABEGÁS (2014) and IBGE (2014).
rate cooled down and the domestic Otto-cycle fuel
consumption increased (Figure 2).
In this regard, the amount of credit available for
buying cars and motorcycles in the Brazilian market
deserves special mention. Between 2003 and 2007,
auto loans to individuals virtually tripled (Figure 3).
These changes affected demand for vehicles and,
consequently, for fuel, since the percentage of vehi-
cles bought in cash is small. In 2013, for example,
63% of all new vehicles sold in Brazil were financed
through loans, consortium financing or leasing
(ANEF, 2014). The percentage of motorcycles
bought through loans was even higher, namely,
72% of all units sold in 2013.
In addition to the expansion of credit, energy
demand for fuel must have been boosted by the
expansion of the light vehicle fleet resulting from
Figure 3. Auto loans for individuals. Source: BACEN (2014).
Note: * indicates real prices in March 2013.
the drop in the real price of vehicles. According to
IBGE (2014), the real price of new cars dropped
gradually between 2003 and 2013, reaching a reduc-
tion of almost 40% almost the period.
This downward trend was intensified by tempor-
ary reductions in the tax on industrialized products
(IPI) tax rate on new cars, particularly by changes
introduced by the federal government after 2008.
These changes were part of a countercyclical policy
implemented in Brazil to minimize the effects asso-
ciated with the worsening global financial crisis
when signs of a slowdown in the auto industry
growth trend became more evident (Figure 4).
Finally, it is worth mentioning the decrease
recorded in the real price of light fuels in Brazil,
especially after 2006 due to the taxation policy and
the pricing of gasoline sold domestically.

Figure 4. IPI rates charged on new vehicles. Source: Prepared based on the Brazilian law.
Note: * indicates only figures for flex-fuel vehicles with high rates of domestic parts and components were reported.
During this period, increases in the net price of
gasoline sold by refineries owned by Petrobras,
which accounts for over 95% of the refining market
in Brazil, began to be accompanied by reductions in
federal taxes levied on the product with the aim of
avoiding increases in pump prices and inflationary
impacts on the economy.
This systematic reduction in taxes when Petrobras
raised the price of oil by-products led the nominal
price of gasoline at refineries, plus federal taxes, to
remain frozen for about seven years. This scenario
remained unchanged until July 2012, when the fed-
eral fuel tax, or CIDE, was reduced to zero.
From then on, increases in gasoline prices were
no longer offset by tax reductions. However, con-
cerns about controlling inflation led the federal gov-
ernment, through Petrobras, to keep the price of
gasoline below those prevailing on the international
market. According to CBIE (2013), the average gap
between the selling price of gasoline to producers in
the domestic market and its price abroad was higher
than 15% from 2011 to 2013, hitting the mark of
30% in some months.
The situation in the gasoline market also had a
bearing on hydrous ethanol prices. Although biofuel
production is characterized by a competitive struc-
ture and no price controls are applied to biofuel by
the federal government, the price of hydrous ethanol
is limited by the price of its fossil substitute. This is
because, on average, gasoline is economically advan-
tageous for owners of flex-fuel vehicles when the
price of hydrous ethanol is more than 70% higher
than that of gasoline.
APPLIED ECONOMICS 5303
As a matter of fact, hydrous ethanol prices, which
in 2007 dropped owing to a rapid increase in supply,
began to be limited by the price of gasoline when
biofuel prices resumed an upward path in years
marked by crop failure and problems to expand the
supply of biofuels (Diehl 2012).
This light fuel price dynamics led to a significant
reduction in the average fuel price paid by Brazilian
consumers and certainly had some effect on
the demand for private transportation in Brazil
(Figure 5).
III. Literature review
Even though providing a detailed description of the
many papers that assessed demand for light fuels in
different countries is beyond the scope of this article,
a brief summary of the main conclusions reached in
those papers will be presented here with the aim of
identifying any patterns that may help us understand
the problems raised. More details about these studies
may be obtained from Drollas (1984), Dahl and
Sterner (1991), Espey (1998), Goodwin, Dargay,
and Hanly (2004) and Graham and Glaister (2004).
Most studies available in the international literature
were intended to evaluate the sensitivity of gasoline
demand to changes in prices and income. Overall, the
results obtained indicate that fuel demand is inelastic
with respect to price both in the short and in the long
term. In the case of income, the estimates show that the
response of demand in the short term is low and that it
is more sensitive in the long run, showing an elasticity
5304 L. RODRIGUES AND M. R. P. BACCHI
Figure 5. Average pump prices of fuels in Brazil (real prices).
Source: ANP (2014) and IBGE (2014). Note: * indicates real prices in March 2013.
that can slightly exceed one unit in countries with a low
purchasing power population.
In the Brazilian market, most studies that
addressed this issue sought to assess the impact of
introducing flex-fuel vehicles in this sector and the
behaviour of owners of vehicles that can use more
than one fuel with respect to using hydrous ethanol,
gasoline and natural gas.
Studies available in the international literature that
analysed this topic in Brazil include those carried out
by Santos (2013), Salvo and Huse (2013), de Freitas
and Kaneko (2011) and Alves and Bueno (2003).
Except for the study by Salvo and Huse (2013),
who used primary data collected from vehicle own-
ers, the other studies based their analysis on evalua-
tions of individual demand for gasoline, hydrous
ethanol or natural gas.
Despite using virtually the same explanatory vari-
ables in their assessment of demand (income and
prices), the results of studies that assessed the domestic
market were different than those found in other
countries.
The estimates obtained for the Brazilian case sug-
gest a demand that is very sensitive to changes in
prices and income. As a matter of fact, Santos (2013)
estimated the income elasticity of demand for
hydrous ethanol at 3.722 and also reached the con-
clusion that demand for ethanol and gasoline in
Brazil is elastic to prices in the long run (−8.465
for ethanol and −1.186 for gasoline). Along the
same line, de Freitas and Kaneko (2011) estimated
figures significantly higher than the one for the price
elasticity of demand for ethanol, both in the short
and in the long term (−1.413 for the short term and
−1.801 for the long term).
This divergence of results is due to the fact that
gasoline consumption in other countries can be
taken to represent demand for private transporta-
tion, since this oil by-product is the only fuel that
can be used by Otto cycle vehicles. In Brazil, how-
ever, individual estimates of demand for gasoline fail
to portray demand for private transportation appro-
priately, since a significant percentage of the vehicle
fleet can use another type of fuel.
In this regard, it should be clarified that total
gasoline consumption in Brazil is given by its con-
sumption by owners of gasoline-fuelled vehicles,
who have no other option but to use this fuel, and
by the consumption of gasoline by owners of vehi-
cles that can be fuelled by more than one type of
fuel, who can use the fuel that best suits their interest
according to the relative prices of the products and
their preferences (the same logic can be applied to
the case of hydrous ethanol). For more details, see
the conceptual framework proposed by Salvo and
Huse (2011).
Therefore, although they provide important indi-
cations for understanding the level of substitution
between hydrous ethanol, gasoline and natural gas
when the prices of these products change (inputs for
obtaining private transportation services), the results
obtained by studies that assessed demand in the
domestic market have limitations and should be
interpreted with caution for use in the analysis pro-
posed in this article, which like the vast majority of
studies available in the international literature

focuses on understanding total demand for Otto
cycle fuels (amount of miles demanded for private
transportation purposes).
This approach provides answers to important
questions that have not been fully answered in
Brazil so far, such as: What is the impact of the
gasoline pricing policy on total consumption of
Otto cycle fuels? Will new exemptions for the auto-
motive industry require additional fuel imports?
What is the sensitivity of demand for private trans-
portation to changes in vehicle prices and in credit
market conditions in Brazil?
IV. Methodology
Considerations on the model adopted
Relying on the same strategy adopted by several
studies in this area, the conceptual framework used
in this article to carry out the proposed analysis is
based on the theory of household production (see
Muth 1966), which suggests that consumers com-
bine fuel and vehicle stocks for producing private
transportation services.
In this regard, as pointed out by Ajanovic et al.
(2012), Storchmann (2005), Johansson and Schipper
(1997), among other authors, light fuel demand (C)
can be conceptually defined by three key compo-
nents: (a) light vehicle stock (V), (b) efficiency or
performance of vehicles in operation (Re) and (c)
intensity of use of the fleet available (Dp). Thus:
C ¼ f ðV; Re; DpÞ (1)
In the Brazilian case, analyses of tests conducted
by Inmetro (2014) suggest that no significant
changes occurred in the efficiency of new vehicles
sold during the period under evaluation, which
therefore eliminates the need to use a variable to
represent improvements in the performance of the
fleet (Re).
Regarding the other variables of Equation (1),
Dahl and Sterner (1991) claim that the vast majority
of studies in this area only use income and fuel
prices as determinants of the fleet of vehicles (V)
and their frequency of use (Dp).
However, this specification has limitations in
addressing the problem proposed in this article.
Therefore, besides income and fuel prices, two addi-
tional variables were included in the model, namely,
APPLIED ECONOMICS 5305
the amount of credit available for buying vehicles
and their average price.
The effect of credit expansion on the size of the
vehicle fleet is justified by institutional and market-
ing changes in the Brazilian credit market observed
in recent years, which substantially increased the
availability of funds for buying durable goods (for
more details, see Andrade 2012).
In addition, the incorporation of these variables is
also supported by the analysis carried out by De
Negri (1998) and Augusto and Gomes (2008),
which shows the importance of credit and of the
prices of new vehicles in determining the number
of new cars sold in the country.
Thus, the fleet-defining procedure adopted here
followed the logic proposed by Johansson and
Schipper (1997), Belhaj (2002) and Storchmann
(2005), which assumes that vehicle stocks are deter-
mined by economic variables. The model to be esti-
mated is then defined by Equation (2):
C ¼ f ½Pc ; Y; V ðPc ; Y; Cr ; Pv Þ (2)
where C represents light fuel consumption, Pc is the
average fuel price, Y is disposable income, Cr is the
amount of credit available for buying vehicles, and
Pv is the price of new vehicles.
As there are no reliable data on the size and
characteristics of the domestic vehicle fleet in
Brazil, the model specified in Equation (2) was sim-
plified as Equation (3):
C ¼ f ðPc ; Y; Cr ; Pv Þ (3)
@C

@C
 @C @C
with @Pc 0 @Y 0 @Cr > 0 @P v
<0
This procedure limits the analysis of results and
prevents procedures similar to those adopted by
Small and Van Dender (2007), who estimated a
model that simultaneously determines vehicles, vehi-
cle miles traveled, and fuel efficiency from being
used. Even though it reduces the level of detail of
the results, the structure presented here meets the
objectives outlined in this study, as it allows for the
total effect of changes in each of the variables on
demand for private transportation to be quantified.
Finally, it is worth mentioning that it is unusual
to include variables representing the cost of public
transportation in analyses of fuel demand based on
aggregated data. In the Brazilian case, this strategy is
5306 L. RODRIGUES AND M. R. P. BACCHI
appropriate for the period under analysis because
the replacement of private transportation by public
transportation is limited due to the quality, security
and availability problems associated with the public
system.
Econometric procedure
The characteristics and availability of data, as well as
the need to identify different answers for demand in
the short and long term, led to the selection of time
series techniques for estimating the model presented
in Equation (3).
Therefore, the econometric procedures that were
adopted had as a starting point the performance of
unit root tests, with the aim of identifying the inte-
gration order of the series. To verify the presence of
a single root in the series-generating stochastic pro-
cess, the following tests were applied: DF-GLS
(Elliott, Rothenberg, and Stock 1996), NG–Perron
(Ng and Perron 2001) and KPSS (Kwiatkowski
et al. 1992).
Once the integration order of the series was iden-
tified, the model defined by Equation (3) was esti-
mated from an autoregressive vector model – VAR
(Sims 1980).
A p-order VAR model of a set of K endogenous
variables yt ¼ ðy1t ; . . . ; yKt Þ for k ¼ 1; . . . ; K may be
defined as
yt ¼ A1 yt1 þ . . . þ Ap ytp þ μt
where A1 contains the ðK  K Þ coefficient matrices
for i ¼ 1; . . . ; p and μt is a K-dimensional process
 
with E μt ¼ 0, with a time-invariant positive defi-
 0
nite covariance matrix, E μt ; μt ¼ σ μ .
The presence of long-run stable relationships
between variables was tested according to the proce-
dure proposed by Johansen (Johansen 1988, 1991;
Johansen and Juselius 1992). Once the presence of
cointegration is identified, the VAR model expressed
by Equation (4) is then rewritten in the form of a
vector error-correction model (VECM).
With the aim of avoiding misinterpretations
related to the orthogonalization of shocks, a VAR
structural approach based on the decomposition
model introduced by Sims (1986) and Bernanke
3
The use of diesel as an alternative fuel for private transportation services is not justified in Brazil, as the marketing of diesel-fuelled light passenger vehicles
has been prohibited since 1976.
(1986) was used. Thus, the cointegrated VAR was
estimated using the contemporaneous restriction
defined by the following matrix:
yt ¼ ½Ct ; Yt ; Pct ; Crt ; Pvt  (5)
2 3
1 a12 a13 a14 a15
60 1 0 0 0 7
6 7
6
E¼60 0 1 0 0 7 (6)
7
4 0 a42 0 1 a45 5
0 0 0 0 1
where Ct represents light fuel consumption, Yt is
income, Crt denotes the amount of credit for buying
vehicles, Pct is the average light fuel price and Pvt
corresponds to the average price of new vehicles.
The constraint matrix represented in Equation (6)
assumes that light fuel consumption is contempor-
aneously influenced by all the model variables but
does not have a contemporaneous influence on
price. The description given in previous sections
makes it clear that this assumption is valid for the
prices of gasoline and compressed natural gas
(CNG), as their supply is virtually controlled by a
single company and price adjustment decisions are
made regardless of demand conditions. This logic
can also be applied to hydrous ethanol prices in
Brazil, whose cap is determined by gasoline prices.
Database
The sample used in the estimation consisted of 120
(4) observations made from April 2003 to March 2013
that were selected due to the availability of reliable
data for analysis. The analysis was carried out using
aggregate data for the country, since there is no
disaggregated information to represent part of the
model variables.
Energy consumption by the light vehicle fleet was
calculated by converting hydrous ethanol and CNG
volumes into gasoline equivalents.3 This procedure
standardizes the average distance travelled per litre
of each fuel, allowing for the volume of each fuel to
be added to represent demand for private
transportation.
In the case of CNG, the conversion coefficient was
calculated based on the amount of energy in the fuel,
equivalent to 1.23 m3 of CNG per litre of C gasoline
(EPE 2014). For hydrous ethanol, a ratio of 0.70 L of

gasoline per litre of hydrous ethanol was adopted,
based on tests conducted by INMETRO (2014).
To compose this series, monthly data on con-
sumption of gasoline and hydrous ethanol obtained
from ANP (2014) were used, as well as CNG con-
sumption data compiled by ABEGAS (2014).
The average fuel price for consumers was calculated
as a Divisia index, which weights the prices of three
products (hydrous ethanol, gasoline, and natural gas) by
the respective shares of each component in total spend-
ing with fuel.4 For this purpose, data released by ANP
(2014) on monthly prices at fuel stations were used.
New car prices were in turn obtained from IBGE
(2014) and the amount of credit for buying vehicles,
based on direct-to-consumer auto loans to indivi-
duals, was obtained from reports issued by the
Brazilian Central Bank (BACEN, 2014).
For disposable income, several proxies were used
to represent changes in the purchasing power of
consumers in Brazil. Thus, to ensure greater robust-
ness in the results, three versions of the model in
Equation (3) were estimated.
In the first version of the model, the gross domestic
product calculated by the IBGE (2014) was used to
represent available income (variable income_1). In the
second version, electricity consumption as reported by
ELETROBRÁS (2014) was used as a proxy for income
(variable income_2). Finally, in the third version of the
model, the average income of employed individuals
calculated by IBGE (2014) was used (income_3).
Monetary series were converted into real values for
March 2013 using the Extended National Consumer
Price Index – IPCA (IBGE, 2014) as a deflator. Except
for prices and the income of employed individuals, per
capita figures were obtained using data for the total
resident population published by IBGE (2014).
All the series were log-transformed to reduce var-
iance and allow for the estimated coefficients to be
interpreted as elasticities.
V. Results and discussion
Unit root and cointegration tests
The results of the tests conducted to identify the
presence of a root in the variables are presented in
4
This index was selected with the aim of allowing for monthly changes in the weights used to calculate the average price of light fuel. This characteristic is
consistent with the Brazilian market, which is characterized by the presence of a vehicle fleet that can use different types of fuels.
5
The estimated system was verified using the Jarque–Bera test for the hypothesis of normally distributed residuals, the multivariate versions of the Ljung–
Box and Breusch–Godfrey autocorrelation tests, and the ARCH-LM test for the presence of conditional heteroscedasticity.
APPLIED ECONOMICS 5307
Table 1. By comparing the critical values with the
test statistics, it can be concluded that the values
indicate the presence of a unit root across all series.
Thus, the proposed VAR should be estimated
with the first difference of the series and the pre-
sence of long-run relationships between them must
be assessed using cointegration tests.
The optimal lag length selected was p = 4 for the
three versions of the model. This choice was deter-
mined by a joint analysis of the AIC, the Hannan–
Quinn Information Criterion – HQ, the final
prediction error – FPE, the sequential modified LR
test statistics – LR and the Schwarz Bayesian
Criterion – SC.
Once the optimal number of lags was identified,
the assessment of the presence of long-run stable
relationships between the variables was tested. In
all versions of the model specified in Equation (3),
seasonal dummies and two additional dummy vari-
ables were used, denoted as ipi_1 and ipi_2, which
assume value 1 in months in which the IPI tax rate
for vehicles was temporarily reduced and zero in the
remainder of the period under analysis.
The first variable (ipi_1) refers to exemptions
granted in late 2008, while the second one refers to
reductions initiated in the second half of 2012 (see
Figure 4). The purpose of introducing IPI-exemp-
tion dummies is to identify the impact of this mea-
sure on fuel demand in the Brazilian market.
The trace test was applied to the model in
Equation (3) with this specification. The results
obtained, as presented in Table 2, show that the
existence of at least one cointegrating vector is not
rejected at one percent significance level. Thus, a
cointegrated VAR was used for estimating the three
versions of the model.5
Estimated results
Table 3 shows the estimates obtained for the equa-
tion Δconsumptiont by the identified model. In this
case, special mention should be made of the esti-
mated coefficient of the dummy variable that was
used to assess the impact of the first temporary
exemption of the IPI tax on cars initially granted
5308 L. RODRIGUES AND M. R. P. BACCHI

Table 1. Results of the tests for unit root.

Variable Test pa Test value Critical values (1%)b Conclusion
Fuel consumption DF-GLS 11 −1.727 −3.570 I(1)
NG–Perron 14 2.039 −2.580 I(1)
KPSS 9 1.308 0.739 I(1)

Fuel price DF-GLS 2 −0.145 −2.585 I(1)

NG–Perron 7 0.299 −2.580 I(1)
KPSS 9 0.856 0.739 I(1)

Credit DF-GLS 1 −0.811 −2.585 I(1)

NG–Perron 12 −0.830 −2.580 I(1)
KPSS 9 0.819 0.739 I(1)

Vehicle price DF-GLS 1 2.716 −2.585 I(1)

NG–Perron 4 2.552 −2.580 I(1)
KPSS 9 1.202 0.739 I(1)

Income_1 DF-GLS 12 0.671 −2.587 I(1)

NG–Perron 12 0.629 −2.580 I(1)
KPSS 9 1.268 0.739 I(1)

Income_2 DF-GLS 0 0.263 −2.585 I(1)

NG–Perron 0 0.332 −2.580 I(1)
KPSS 9 1.245 0.739 I(1)

Income_3 DF-GLS 0 1.077 −2.585 I(1)

NG–Perron 0 1.135 −2.580 I(1)
KPSS 9 1.281 0.739 I(1)
Tests performed with a constant.
a
For defining the autoregressive components, the Schwarz Information Criterion was used in the DF-GLS test and the Akaike
Modified Information Criterion in the Ng–Perron test. The automatic selection procedure proposed by Newey and West (1994)
was used in the KPSS test.
b
DF-GLS: critical values obtained from Mackinnon (1996); NG–Perron: obtained from Ng and Perron (2001); KPSS: obtained from
Kwiatkowski et al. (1992).

Table 2. Johansen cointegration tests (trace). accounted for a significant proportion of car sales
Hypothesis a
in 2009. In that year, notwithstanding a drop in
Null Alternative Test statistics Critical values (1%)b income, fuel consumption increased by almost 6%.
Version 1 The parameter for the ipi_2 variable, in turn, had
r=0 r>0 154.90 66.52
r≤1 r>1 19.90 45.58 the expected sign as well, suggesting a direct rela-
r≤2 r>2 9.43 29.75 tionship with demand for light fuels. However, the
Version 2
r=0 r>0 201.67 84.45 estimated coefficient was not statistically significant,
r≤1 r>1 32.22 60.16
r≤2 r>2 18.41 41.07
making it difficult to be more assertive about the
Version 3 effect of the second tax exemption on fuel
r=0 r>0 190.29 66.52
r≤1 r>1 27.31 45.58 consumption.
r≤2 r>2 11.36 29.75 As for elasticities, Table 4 shows the coefficients
a
r is the cointegration rank. for the cointegration vector estimated for all the
b
Critical values obtained from Osterwald–Lenun (1992).
three variants of the model, taken as long-term elas-
ticities for the proposed analysis. In this case, deter-
in late 2008 on fuel demand (ipi_1). The positive ministic components were omitted and the signs of
sign of the estimated parameter and its high sta- the parameters were inverted to establish a direct
tistical significance indicate that the countercycli- relationship for determining consumption.
cal measures taken to mitigate the effects of the The short-term elasticities, in turn, were calcu-
global financial crisis on the Brazilian economy led lated based on the error-correction model and are
to increased light fuel consumption in the country. presented in Table 5.
This result is consistent with those of the studies It can be seen that the signs of the coefficients
conducted by Alvarenga et al. (2010) and IPEA correspond to the relationships contemplated in the
(2009), whose findings indicate that the reduction economic specification of the model. The two excep-
in the tax levied on the price of new vehicles tions were the parameters representing the short-run
 APPLIED ECONOMICS 5309

Table 3. Estimates of short-run relationship for the equation Δconst.

Model version 1 Model version 2 Model version 3
Variable Coefficient Standard errors Coefficient Standard errors Coefficient Standard errors
α −0.499 *** 0.0388 −0.664 *** 0.0472 −0.298 *** 0.0196
Ipi_1 0.024 *** 0.0066 0.023 *** 0.0066 0.022 *** 0.0065
Ipi_2 0.008 0.0084 −0.015 0.0095 0.000 0.0085
Δconst-1 −0.543 *** 0.1096 −0.515 *** 0.1278 −0.736 *** 0.1056
Δconst-2 −0.326 ** 0.1260 −0.453 *** 0.1435 −0.462 *** 0.1289
Δconst-3 0.038 0.1103 −0.025 0.1187 −0.015 0.1145
Δincomet-1 −0.396 ** 0.1532 −0.240 0.1695 0.261 0.2351
Δincomet-2 −0.237 0.1537 −0.075 0.1591 0.138 0.2323
Δincomet-3 0.166 0.1469 −0.331 ** 0.1552 −0.277 0.2241
Δprice_fuelt-1 −0.337 ** 0.1612 −0.177 0.1643 −0.244 0.1650
Δprice_fuelt-2 0.164 0.1756 0.180 0.1742 0.216 0.1821
Δprice_fuelt-3 −0.213 0.1604 −0.126 0.1608 −0.194 0.1664
Δcreditt-1 −0.031 0.0263 −0.041 0.0249 −0.068 *** 0.0255
Δcreditt-2 −0.035 0.0248 −0.058 ** 0.0249 −0.076 *** 0.0245
Δcreditt-3 −0.027 0.0250 −0.016 0.0243 −0.025 0.0239
Δprice_veichlet-1 0.030 0.3168 −0.392 0.4317 −0.103 0.3282
Δprice_veichlet-2 −0.348 0.3211 −0.431 0.3459 −0.666 * 0.3374
Δprice_veichlet-3 −0.072 0.3201 −0.010 0.3191 −0.105 0.3321
Seasonal dummies
* Significance at 10% in t-statistics. ** Significance at 5% in t-statistics. *** Significance at 1% in t-statistics.

Table 4. Long-run elasticities in light fuel demand. between −0.306 and −0.126, while the long-run coef-
Version of the model Income Fuel price Credit Vehicle prices ficient ranged from −0.466 to −0.131.
Version 1 0.663 −0.131 0.089 −0.322 Indeed, demand response in the short term is
(0.0481) (0.121) (0.0298) (0.0789)
Version 2 0.851 −0.442 0.081 −0.358 limited by the fleet of vehicles in operation, and
(0.0527) (0.1462) (0.0327) (0.0963) changes in consumption patterns occur only through
Version 3 0.529 −0.466 0.244 −0.216
(0.0702) (0.2259) (0.0460) (0.1075) changes in the intensity of use of these vehicles. In a
Standard errors in parentheses. longer-term analysis, however, this restriction ceases
to exist and more intense demand adjustments are
observed. In this scenario, consumers may, for
Table 5. Short-run elasticities in light fuel demand.
example, change the quantity, characteristics and
Version of the model Income Fuel price Credit Vehicle prices
Version 1 0.380 −0.126 0.038 0.265
even performance of the in-service fleet.
(0.1181) (0.1374) (0.0231) (0.2724) The results obtained also indicate that demand
Version 2 0.684 −0.306 0.073 −0.056
(0.1262) (0.1364) (0.0208) (0.2566) responses to changes in income and fuel prices in
Version 3 −0.100 −0.244 0.061 0.273 Brazil are not significantly different from the values
(0.2129) (0.1517) (0.0217) (0.2893)
identified in the international literature for other coun-
Standard errors in parentheses.
tries. Therefore, it is not possible to assert that con-
sumption growth in Brazil in the period under analysis
relationship between consumption and vehicle prices is due to a different behaviour of demand for fuels.
in the second version of the model, which had an Besides income and fuel prices, the estimated
opposite sign and were not statistically significant, parameters revealed the relevance of auto loans and
and income elasticity in the third version. light-vehicle prices in defining demand for private
The income and demand price elasticities transportation in Brazil. The likelihood ratio test
obtained suggest that fuel demand is more sensitive performed to assess the significance of the estimated
to changes in these two economic variables in the cointegrating vector coefficients for these variables
long term. In fact, the short-run income elasticities showed that credit and new car prices are highly
obtained ranged from 0.380 to 0.684, as compared to significant in the long-run relationship obtained.6
the 0.529–0.851 interval in the long term. As for fuel In this regard, the coefficients shown in Table 5
prices, the estimated short-run elasticity stood suggest that a 10% rise in loans for light vehicles
6
Statistics for the likelihood ratio test with one degree of freedom and under the hypotheses H0: Βcredit = 0 and H0: Βvehicle price = 0, were: credit 2
= 9.32
(p-value = 0.002) and vehicle
2
price = 7.74 (p-value = 0.005) for version 1;  2
credit = 10.53 (p-value = 0.001) and  2
vehicle price = 11.76 (p-value = 0.000) for version
2; credit
2
= 17.01 (p-value = 0.000) and vehicle
2
price = 1.99 (p-value = 0.16) for version 3.
5310 L. RODRIGUES AND M. R. P. BACCHI
leads, in the long term, to an increase from 0.81 to
2.44% in fuel consumption, depending on the ver-
sion used. This ratio is significant if one considers
that the total amount of auto loans virtually tripled
over the 2003–2013 period.
With respect to car prices, the estimated long-run
parameters show that a 10% drop in new car prices
leads to an increase of 2.16–3.58% in fuel demand.
This result, coupled with the persistent downtrend in
new car prices observed since 2008, makes it possible
to infer that this variable was a relevant factor in
determining fuel demand in the post global crisis
period. Moreover, this evidence is in line with a
previously held discussion on the impact of a lower
reduction in the IPI tax for vehicles on fuel con-
sumption in Brazil.
The contribution of credit and new car prices to
understanding the evolution of fuel demand can also
be checked by analysing the historical decomposi-
tion of the forecast error variance of consumption.
This procedure is designed to identify the impor-
tance of each type of shock recorded in the past in
explaining the deviations of the observed values for
the variable of interest, based on a forecast made at
the beginning of a selected period.
In this study, the forecast was made for the refer-
ence period between January 2007 and the end of the
series (March 2013). This period was chosen with
the aim of incorporating moments in which there
was an increase in the growth rate of consumption
and a decline in that of income.
The historical decomposition results presented in
Figure 6 show that the deviations between the
Figure 6. Error derived from the historical decomposition of the forecast error variance of consumption.
predicted and actually measured values were rela-
tively small by the end of 2007. In 2008, particularly
during the second half of that year, the magnitude of
the deviations began to increase significantly, peak-
ing at close to 15% in 2009 and to 20% at the end of
2012. During this period, consumption forecast
errors were positive, indicating that the observed
value was smaller than that predicted by the model.
In this analysis, it is also possible to decompose
the forecast errors of the model based on forecasts
made when only one of the factors influencing con-
sumption was considered. This strategy is meant to
identify the contribution and relevance of each fac-
tor to the observed error.
An assessment of the results of this procedure, as
presented in Figure 7, shows that credit and new car
prices were the variables that contributed the most
to the historical decomposition of the forecast error
variance of consumption as of 2008.
VI. Concluding remarks
This article focused on understanding the dynamics
of energy demand by the Brazilian light-vehicle fleet
in the 2003–2013 period.
The results show that demand for energy by the
light-vehicle fleet had a limited response to changes
in fuel prices. However, despite this low elasticity,
the decline in real fuel prices was key for under-
standing the sharp increase recorded in Otto-cycle
fuel consumption in Brazil, considering that the
policy of preventing gasoline price increases to
keep inflation under control led to a drop of almost

Figure 7. Percentage contribution of income, fuel prices, credit, and vehicle price variables to the historical decomposition of the
forecast error variance of fuel consumption.
25% in real average fuel prices between early 2003
and 2013.
In the case of income, the estimated parameters
indicated a long-run elasticity varying from 0.529 to
0.851 and lower values for short-term elasticity. The
coefficients obtained for this variable show that,
should the demand response pattern be repeated in
coming years, any growth in the economy that is not
offset, for example, by a sharp hike in fuel prices, by
measures to control the expansion of the fleet, by
improvements in the public transportation system,
or by policies to increase vehicle efficiency will
require an increased domestic supply of fuels.
In addition to the analysis focused exclusively on
income and fuel prices, the results showed an intrin-
sic relationship between the performance of the
automotive market and demand for light fuels.
The estimated coefficients indicate that auto loans
and new car prices had a statistically significant rela-
tionship in determining fuel demand. Furthermore,
the results suggest that a significant portion of con-
sumption deviations not explained by the model esti-
mated after 2008 resulted from unanticipated shocks
in the amount of credit available for buying new
vehicles and in the price of those goods.
In this regard, the results showed that a policy to
boost the automotive industry, with a reduction in
the IPI tax rate levied on new cars, also had a
positive impact on light fuel consumption in Brazil,
particularly in 2009, when the effects of the global
financial crisis on the economy and on the availabil-
ity of auto loans were more visible.
APPLIED ECONOMICS 5311
Therefore, the analysis conducted indicates that
the evolution of energy demand by the light-vehicle
fleet between 2003 and 2013 cannot be explained
from a single perspective. The effects of a downturn
in fuel prices, of a higher income, of the availability
of more credit for buying cars and motorcycles, and
of a systematic drop in car prices – sometimes
amplified by the measures that were taken to reduce
the IPI tax rate on those goods – were interspersed
throughout the period under analysis.
The stimulus given to individual transportation
over this period posed an additional challenge to
ensure fuel supply in the domestic market, as a
significant increase in demand was not offset by
expanded domestic supply or a by more robust
infrastructure for importing oil by-products. Today,
no new projects for building ethanol plants are being
implemented in the country and the refineries that
are being built were optimized to produce diesel oil.
Some of the measures taken also gave contradic-
tory signals to agents in that market. While on the
one hand the measures to control gasoline prices, for
example, served to boost fuel demand, on the other
they imposed restrictions on new investments to
increase domestic supply.
In this regard, the information provided in this
article to identify the intensity and temporal dynamics
of the response of demand to changes in different
economic variables can be used to conduct forecasting
and scenario-building exercises for the light fuel mar-
ket in Brazil with the aim of allowing agents in that
industry to make a better planning, of assessing
5312 L. RODRIGUES AND M. R. P. BACCHI
initiatives designed to mitigate the side effects of the
policies adopted, and of supporting new guidelines for
this sector to be drawn up by government.
Disclosure statement
No potential conflict of interest was reported by the authors.
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