The Library

Rising household diesel consumption in the United States : a cause for concern? : evidence on asymmetric pricing

Tools

Fosten, Jack. (2012) Rising household diesel consumption in the United States : a cause for concern? : evidence on asymmetric pricing. Energy Economics, Vol.34 (No.5). pp. 1514-1522. ISSN 0140-9883

Preview

Text
WRAP_ Fosten_Diesel_Consumption.pdf - Accepted Version
Download (1040Kb) | Preview

Official URL: http://dx.doi.org/10.1016/j.eneco.2012.06.025

Abstract

Papers in the literature have thus far overlooked the projected increase in U.S. diesel car share when looking at asymmetries in petroleum pricing. This paper addresses this issue by comparing retail gasoline and diesel prices in order to see whether they rise faster than they fall given the price of their upstream input, crude oil. This phenomenon has been termed in the literature as "Rockets and Feathers." We apply the threshold vector error correction model (TVECM) of Hansen and Seo (2002) which has not yet been applied in the literature. We account for the 2008 structural break to crude oil and petroleum prices by splitting the sample using evidence from the recent structural break unit root test of Kim and Perron (2009). Both markets seem to price symmetrically before the 2008 break, but we find evidence of asymmetric pricing after 2008 in diesel prices, and not in gasoline prices. Given that the diesel market is small relative to the gasoline market and therefore more open to price exploitation, the ongoing cost increases associated with the policy of switching to Ultra Low Sulphur diesel (ULSD) from 2006 to 2010 could be at the heart of this asymmetry. With this in mind, the U.S. Federal Trade Commission should monitor diesel prices as the market share grows, in order to ensure that consumers are not adversely affected.

Item Type:

Journal Article

Subjects:

H Social Sciences > HD Industries. Land use. Labor

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Gasoline -- Prices -- United States -- Econometric models, Diesel fuels -- Prices -- United States -- Econometric models, Diesel automobiles -- United States

Journal or Publication Title:

Energy Economics

Publisher:

Elsevier BV

ISSN:

0140-9883

Official Date:

2012

Dates:

Date	Event
2012	Published

Volume:

Vol.34

Number:

No.5

Page Range:

pp. 1514-1522

Identification Number:

10.1016/j.eneco.2012.06.025

Status:

Peer Reviewed

Publication Status:

Published

Access rights to Published version:

Restricted or Subscription Access

References:

BACHMEIER, L. J. & GRIFFIN, J. M. 2003. New Evidence on Asymmetric Gasoline Price Responses. Review of Economics and Statistics, 85, 772-776.
BACON, R. W. 1991. Rockets and Feathers: The Asymmetric Speed of Adjustment of UK Retail Gasoline Prices to Cost Changes. Energy Economics, 13, 211-218.
BORENSTEIN, S., CAMERON, A. C. & GILBERT, R. 1997. Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes? Quarterly Journal of Economics, 112, 305-339.
CHEN, L.-H., FINNEY, M. & LAI, K. S. 2005. A Threshold Cointegration Analysis of Asymmetric Price Transmission from Crude Oil to Gasoline Prices. Economics Letters, 89, 233-239.
CHESNES, M. W. 2010. Asymmetric Pass-Through in U.S. Gasoline Prices. U.S. Federal Trade Commission Bureau of Economics Working Paper No. 302.
DICKEY, D. A. & FULLER, W. 1979. Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74, 427-431.
DOUGLAS, C. C. 2010. Do Gasoline Prices Exhibit Asymmetry? Not Usually! Energy Economics, 32, 918-925.
ELLIOTT, G., ROTHENBERG, T. J. & STOCK, J. H. 1996. Efficient Tests for an Autoregressive Unit Root. Econometrica, 64, 813-836.
ENDERS, W. & SIKLOS, P. L. 2001. Cointegration and Threshold Adjustment. Journal of Business and Economic Statistics, 19, 166-176.
ENGLE, R. F. & GRANGER, C. W. J. 1987. Co-integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55, 251-276.
ESTEVE, V., GIL-PAREJA, S., MARTINEZ-SERRANO, J. A. & LLORCA-VIVERO, R. 2006. Threshold Cointegration and Nonlinear Adjustment between Goods and Services Inflation in the United States. Economic Modelling, 23, 1033-1039.
GODBY, R. & ET AL. 2000. Testing for Asymmetric Pricing in the Canadian Retail Gasoline Market. Energy Economics, 22, 349-368.
HANSEN, B. E. 1996. Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis. Econometrica, 64, 413-430.
HANSEN, B. E. & SEO, B. 2002. Testing for Two-Regime Threshold Cointegration in Vector Error-Correction Models. Journal of Econometrics, 110, 293-318.
JOHANSEN, S. 1988. Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control, 12, 231-254.
JOHNSON, R.N. 2002. Search Costs, Lags and Prices at the Pump. Review of Industrial Organization, 20, 33-50.
KIM, D., PERRON, P. 2009. Unit root tests allowing for a break in the trend function at an unknown time under both the null and alternative hypotheses. Journal of Econometrics, 148, 1-15.
KWIATKOWSKI, D. 1992. Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root? Journal of Econometrics, 54, 159-178.
LIU, M.-H., MARGARITIS, D. & TOURANI-RAD, A. 2010. Is There an Asymmetry in the Response of Diesel and Petrol Prices to Crude Oil Price Changes? Evidence from New Zealand. Energy Economics, 32, 926-932.
OSTERWALD-LENUM, M. 1992. A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics. Oxford Bulletin of Economics and Statistics, 54, 461-472.
PERRON, P. 1989. The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57(6), 1361-1401.
TSAY, R. S. 1989. Testing and Modeling Threshold Autoregressive Processes. Journal of the American Statistical Association, 84, 231-240.
ZIVOT, E., ANDREWS, D.W.K. 1992. Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis. Journal of Business & Economic Statistics, 10(3), 251-270.