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

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.