A DYNAMIC MODEL TO EVALUATE MIXED AUTOMOBILE FUEL MARKET IN
ITALIAN ENVIRONMENT.
Habib Sedehi
HELP Auditing Informatico
Via Livio Andronico, 75 - 00136 Rome
Alessandro Gambaro
Agip Petroli
Federico Lanza
HELP Auditing Informatico
ABSTRA
The automobile fuel market in Italy is appreciably different from that in other European
countries and even more unlike the American context.
As a matter of fact, the alternative and available automobile fuels in this country are the
following:
- gasoline (petrol),
- gas oil (diesel oil),
- liquefied gas (LPG),
plus a very small amount of natural gas, each with its own price. In addition, price
differences are considerably greater than in other countries.
In view of the fact that gasoline is the most expensive fuel and gas oil the least
expensive, the Italian Government has adopted a peculiar tax called "Superbollo" meant
to penalize car owners with diesel powered engines and those with both gasoline and
LPG powered engines, but to a different degree.
The alternative access by drivers (car-users) to different fuel resources has influenced
and continues to influence the automobile industry's approach to the Italian market.
On the other hand, the different fuel prices, plus the varying annual amount of the
"Superbollo" tax, influences the motorist’s decision in buying and using differently
powered cars.
The decision is obviously affected by the consumption rate for each type of fuel and the
driver’s expected mileage per year.
This paper aims to underline and analyze the hypothesis on the mix of the three main
fuels used in Italy, trying to give results principally on the basis of:
7 price-changing of each fuel,
- tax-value of "Superbollo",
- different driver-mileage,
taking into account the pollution-cost of each of the three fuel solutions. The system,
which is the subject of the study, will be analyzed using System Dynamics methodology,
with a dynamic model.
System Dynamics ’90
A DYNAMIC MODEL TO EVALUATE MIXED AUTOMOBILE FUEL MARKET IN
ITALIAN ENVIRONMENT.
Introduction
The Italian market for car fuels has undergone different stages which have
concurred to define cértain distinctive features having some characteristics differing
from those in other European countries.
In Italy, because of the difficulty in finding sufficient quantities of gasoline in war
time, technologies have been developed for the use of natural and liquefied gas (LPG)
as well as gas oil in fueling cars.
Nevertheless, the utilization of these types of fuels as an alternative to gasoline
was always undervalued until the first energy crisis in 1974-75.
It was during that period that the technology of the diesel engine was improved in
order to reduce the noise and smoke and to achieve better performance.
As a consequence of the technological improvement of the vehicles and of the
increase in price differential when compared to gasoline that took place in the eighties,
the sales of diesel automobiles increased.
Later, an additional yearly tax (superbollo) on diesel cars was imposed; this was
added to the normal car tax that existed for al! types of vehicles.
Subsequently, since there was also a significant gap between LPG and gasoline
prices, a "superbollo" tax was also introduced for LPG cars.
The new tax (superbollo), which can be considered as a fixed cost, stimulated an
increase in the yearly mileage covered by the diesel/LPG cars. Indeed, the incidence of
the additional tax on the total amount of car expenses is checked by the increase of the
mileage covered by the car.
Hence, the advanlage in using of diesel cars as compared with gasoline fueled
vehicles depends principally on the difference between the prices of the fuels and the
number of miles covered annually.
The breakeven point is thus situated at different mileage levels and depends on
the of vehicle and on the additional yearly tax that must be paid. It also depends on
the difference existing at any given time between the price of gasoline and that of gas oil,
with the result that any change in either fuel price changes the breakeven point too.
. In most recent years, growing concern about environment pollution caused by
diesel cars (expecially sulphur) induced the authorities to raise the surtax in order to
discourage the use of this kind of vehicle.
This led to a shift of the breakeven point to very high mileage levels, thus many
of the drivers owning a diesel car were induced to consider going back to a four-stroke
engine.
Actually, those who decide to give up their diesel cars often buy a gasoline car
and subsequently transform it to an LPG car.
On the other hand, Italy’s lack of liquefied gas (LPG), limits the number of
vehicles furnished with this type of fuel.
1000 System Dynamics '90
The Process
Presently, nearly 85% of Italian families own at least one car. What should be
underlined is that whereas the number of families owning only one car represents about
50% , the number of families with two or more cars is increasing day by day.
This means that cars turn out to be more and more individual rather than family
possessions and therefore that their use together with their performance requirements
and technical and economical features tend to vary.
The number of young people and women having a car of their own increases;
and, in consequence of a statistical ’shift’, the number of old men possessing a car - often
the same one which used to be the family car in previous years - increases too.
Statisical experts and market-researchers can grasp only some of the aspects of
these changes:
- the increasing yearly mileage together with today’s different uses of the car;
- the differentiation of the market with regard to the typology of vehicles and fuels;
+ purchasing behaviour with reference to the point of sale;
- the reactions to variations in the fuel price and, in general, to variations in the car
ownership and operating costs.
Presently, the cars in Italy total to 22 million units, of which 85% are gasoline
fueled, 10% are of the diesel type and 5% are cars using liquefied gas together with
gasoline (as an alternative) and a very small number of natural gas fueled cars.
Excluding from this analysis the automobiles fed by natural gas, which are limited
to very specific fields (taxi cabs, company-owned cars) and areas of the country, the
factors that act on the evolution connected with the demand for gasoline, diesel and
LPG can be examined from different points of view:
_, First of all we must underline some important economic and technical
considerations:
- in Italy, taxation (government gain) on the gasoline price has always been and
continues to be much greater than in any other Western European country;
- during the last decade, taxation on gas oil for vehicles was lower than that of other
European countries;
- in Italy, the registration tax on gasoline cars (bollo) is Proportional to the nominal
engine horse power and is generally lower than in other European nations;
- diesel cars pay a yearly additional tax (superbollo), which is also basically
proportional to the diesel horse power;
- the purchase price of a diesel car is usually 5% to 10% greater than that of the
corresponding gasoline car;
- the number of dealers that distribute gas oil is nearly 60% of those that sell
gasoline; and generally refueling is less easy (few pumps, no self service facilities,
and pumps generally placed in secondary areas of the filling station);
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1001
- .European automobile manufacturers do not make LPG cars. The transformation,
keeps the gasoline fuel system too, represents an additional cost to the owner and
takes place in specialized garages. The cost of transformation from gasoline fuel to
both LPG and gasoline fuel - which also includes the installation of an LPG tank in
the luggage-compartment, with a consequent reduction by 30-70% of the space
available for the luggage - is not very high: about 500,000 liras ($ 400);
- the cars thus transformed can be fed either with gasoline or LPG: in the latter case,
they may suffer a decrease in level of performance, i.e, speed and acceleration. Like
diesel cars, these cars too are liable to a yearly additional tax, but it is less expensive
(about 40%). This happens because the shortage of LPG sale points (only 1800 units
in 1990) often leads users to drive part of their yearly mileage on gasoline instead of
LPG, thus reducing proportionally the savings linked to this kind of fuel;
- the price of automobile car fuels expressed in Lire/litre up to date are as following:
L/LT %
GASOLINE 1425 100
GAS-OIL ; 916 64
LPG 515 40
- the medium specific constimption tates for different car categories having the same
potential as the gasoline model are the following:
gasoline = 100
as oil = 70
= 120
Summarizing, the following tables (1&2) show a comparison between the
ownership and operating costs for similar vehicles, considering the different additional
taxes (Guberbollo) and the different degrees of efficiency (km/It); the costs are related to
varying levels of yearly mileage, always excluding, when referring to LPG, the difference
between the cost of purchase and the cost of transformation:
1002 System Dynamics '90
(1989) Medium Direct management costs Mileage (Km)
10,000 20,000 30,000
Gasoline
Specific Consumption; 10 km/It.
Car tax _(bollo) 6L/km 3L/km 2L/km
(14 HP) 60,000 Lire
Additional tax (Superbollo) 0 0 0
0 Lire
Fuel cost 140 L/km 140L/km 140 L/km
~1400 Lire/It
Gas oil (Diesel)
Specific Consumption; 12 km/It.
Car tax (bollo) 10L/km 5L/km 3,4L/km
(17 HP) 100,000 Lire
Additional tax (Superbollo) 60L/km 30L/km 20L/km
600,000 Lire
Fuel cost 67 L/km 67L/km 67L/km
~800 Lire/It
GPL
Specific Consumption; 8 Km/It.
Car tax (bollo) 10L/km 5L/km 3,4L/km
(17 HP) 100,000 Lire
Additional tax (superbollo) 30L/km 15L/km 10L/km
300,000 Lire
Fuel cost _ 65L/km 65L/km 65L/km
~520 Lire/It
Table 1
The Italian driver
The sudden growth in the number of cars, which as noted earlier has now
reached 22 millions, has determined an extremely varied articulation of the market from
the psycho-social point of view with regard to purchase behaviour and to the
development of supply.
This market articulation has great importance as a basis for the hypothesis of
adaptation to the development of some market supply considerations. Thus, in order to
hasten market development through a series of interventions, knowledge of driving
habits and other factors that contribute to defining the market structure seems
indispensable.
Indeed, nowadays we can talk about different kinds of market, each with its own
characteristics nevertheless, there are certain overlapping areas.
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1003
Proposal Gasoline -LPG Diesel
MILEAGE
< 10,000 60% 13% 3%
10-20,000 35% 40% 12%
20-30,000 2% 24% 34%
> 30,000 3% 23% 45%
100% 100% 100%
MAIN USE
Work 22% 37% 54%
Home/Work 30% 25% 24%
Other uses 16% 13% 5%
Vacations/ 32% 25% 17%
Journeys
100% 100% 100%
AGE
<25 years 19% 14% 14%
25-40 years 31% 47% 45%
>40 years 50% 39% 39%
100% 100% 100%
Table 2
Moreover, it is interesting to see, according to the results of market research,
what the drivers’ opinion is of the most evident disadvantage of their choice:
Gasoline: _ high price of the fuel
LPG: lack of points of sale
Gas oil: great noise; the efficiency is generally lower than that of similar gasoline
cars; the cost of the additional tax (superbollo).
1004 System Dynamics ’90
The pr iv
The aim of our project is to determine the prospects for the evolution of the
demand for the three types of fuel, taking into account the above-mentioned
characteristics of the levels of the market and the modifications that some of the main
elements can undergo.
In particular:
1) We must consider that the Italian price of gasoline is the highest in Europe and.
that a community adjustment is to be expected, with a drop in price as possible
consequence.
2) The second problem is whether the additional taxes on gas oil and LPG cars
will still remain the same, even after the community adjustment, or whether
they will be reduced or even abolished.
3) At present, LPG use is restricted by lack of points of sale. Recent measures,
which could imply a significant rise in their number, may lead to a new increase
in the LPG use.
4) The whole operation may cause a modification in fiscal revenue, which could be
balanced by modificating the car tax to all types of cars.
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1005
The model
As has been shown above, there are more than a few variabiles and parameters
that influence the decision of a potential driver in choosing between one type of car and
another. .
The dynamic model based on a system-dynamics approach which we constructed
takes into account the most important characteristics of the Italian fuel market mix .
The principal dynamic of the model is shown in Table 1 and Tepresents how the
rate (increasing/decreasing) of the market level of different automobile categories
(gasoline, diesel, LPG) changes by the share of demand.
GASOLINE DIESEL
DYNAMICS DYNAMICS
Fig. 1 CAR-MARKET DEMAND
Again, as shown in Fig. 1, each type of car has its own dynamics. These dynamics
are evaluated, in the model, through a cost function which is defined for each car fuel
considered.
The cost function is calculated applying a number of quantitative and qualitative
parameters:
- maintenance cost (Lire/km)
~ normal and additional (superbollo) taxation (Lire)
- mileage per year (km)
- fuel consumption rate (Lt/km)
- pollution cost (Lire/km)
- SommBnty disturbance cost (Lire)
- number of fuel sale points
Each of the model parameters for each type of car has a heavy or light influence.
For example, as shown in Fig. 2, the diesel car cost is strongly influenced by superbollo
1006
System Dynamics ‘90
and pollution costs and at the same time the superbollo cost itself depends heavily on
the level of the diesel car market, which increases/decreases on the basis of drivers’
average mileage.
DRIVER MILEAGE/YEAR
+
— 4 —_ oS
ww > :
SUPERBOLLO DIESEL-CAR
COST LEVEL
POLLUTION
COST
Fig. 2 DIESEL DYNAMICS
Results
The model is being run for a period of 10 years beginning with 1986. This has
been done with the aim of verifying the validity of the model for the period 1986-1989.
The simulation interval is one year and the automobile fleet that has been taken
into account is not the total number of Italian cars, but rather the so called “critical fleet"
which represents the automobiles in the share of market which can potentially be of the
three serent fuel types. However, some specific production-market constraint is
considered.
____, Even though in this first version of the model we have over simplified some
situations the early results are particularly interesting.
In fact, the model experimented over this 1986-1989 period gave surprising
results compared to real data.
The simulation for future years, with some realistic assumptions, confirms the
tendency of the market share for diesel for long mileages (> 30,000 km/year) and LPG
for medium mileages (20,000 km/year), leaving the gasoline car market concentrated
principaly over the short mileages. This tendency, however, is seen over the long term.
The model is still in the development.phase, and the authors hope.to present
more concrete results by conference time.
