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

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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
Date:	2012
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
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URI:	http://wrap.warwick.ac.uk/id/eprint/50823

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