Do ethanol prices in Brazil follow Brent price and international gasoline price parity?

After the introduction of flexfuel vehicles in Brazil, hydrated ethanol and gasohol (gasoline blended with anhydrous ethanol at an average volumetric proportion of 75:25) became basically perfect substitutes. This paper tests the hypothesis that hydrated ethanol prices follow the price of gasohol in Brazil (opportunity cost of ethanol). In addition it tests the hypothesis that gasoline ex-refinery price variation in Brazil tends to follow the variation in the Brent crude spot price. By testing these two hypotheses simultaneously, this study test a more general hypothesis that expresses the influence of Brent spot prices on hydrated ethanol prices in Brazil (second order effect). Findings indicate that a variation in the Brent spot price does not automatically cause a variation in gasoline ex-refinery prices in Brazil. The best correlation found was between the Brent price fluctuation and the six-month average gasoline ex-refinery price. In case of gasohol and ethanol pump prices, this relation is elastic over the long and short-term in the Brazilian market. However, the short-term elasticity is greater than that over the long run. (C) 2011 Elsevier Ltd. All rights reserved.