IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v31y2009i6p867-881.html
   My bibliography  Save this article

The pass through of oil prices into euro area consumer liquid fuel prices in an environment of high and volatile oil prices

Author

Listed:
  • Meyler, Aidan

Abstract

Crude and refined oil prices have been relatively high and volatile on a sustained basis since 1999. This paper considers the pass through of oil prices into consumer liquid (i.e. petrol, diesel and heating) fuel prices in such an environment. The pass through of oil prices into consumer liquid fuel prices has already been addressed extensively in the literature. Nonetheless much of this literature has either focused on the United States or on a time period when oil prices were relatively stable, or has used monthly data. The main contribution of this paper is a comprehensive combination of many features that have been considered before but rarely jointly. These features include: (1) the analysis of the euro area as an aggregate and a large number of countries (the initial 12 member states); (2) the consideration of different time periods; (3) the modelling of the data in raw levels rather than in log levels. This turns out to have important implications for our findings; (4) the use of high frequency (weekly) data, which, as results will suggest, are the lowest frequency one should consider; (5) the investigation of the different stages of the production chain from crude oil prices to retail distribution -- refining costs and margins, distribution and retailing costs and margins; (6) the examination of prices including and excluding taxes -- excise and value-added; (7) the modelling of prices for three fuel types -- passenger car petrol and diesel separately and home heating fuel oil; (8) lastly we also address the issue of possible asymmetries, allowing for the pass through to vary according to (a) whether price are increasing or decreasing and (b) whether price levels are above or below their equilibrium level. The main findings are as follows: First, as distribution and retailing costs and margins have been broadly stable on average, the modelling of the relationship between consumer prices excluding taxes and upstream prices in raw levels rather than in logarithms has important implications for the stability of estimates of pass through when oil price levels rise significantly. Second, considering spot prices for refined prices improves significantly the fit of the estimated models relative to using crude oil prices. It also results in more economically meaningful results concerning the extent of pass through. Third, oil price pass through occurs quickly, with 90% occurring within three to five weeks. Fourth, using a relatively broad specification allowing for asymmetry in the pass through from upstream to downstream prices, there is little evidence of statistically significant asymmetries. Furthermore, even where asymmetry is found to be statistically significant, it is generally not economically significant. Lastly, these results generally hold across most euro area countries with few exceptions.

Suggested Citation

  • Meyler, Aidan, 2009. "The pass through of oil prices into euro area consumer liquid fuel prices in an environment of high and volatile oil prices," Energy Economics, Elsevier, vol. 31(6), pages 867-881, November.
  • Handle: RePEc:eee:eneeco:v:31:y:2009:i:6:p:867-881
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140-9883(09)00120-0
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, pages 99-126.
    2. Galeotti, Marzio & Lanza, Alessandro & Manera, Matteo, 2003. "Rockets and feathers revisited: an international comparison on European gasoline markets," Energy Economics, Elsevier, pages 175-190.
    3. Michael Ye & John Zyren & Joanne Shore & Michael Burdette, 2005. "Regional Comparisons, Spatial Aggregation, and Asymmetry of Price Pass-Through in U.S. Gasoline Markets," Atlantic Economic Journal, Springer;International Atlantic Economic Society, pages 179-192.
    4. Eckert, Andrew & West, Douglas S., 2005. "Price uniformity and competition in a retail gasoline market," Journal of Economic Behavior & Organization, Elsevier, vol. 56(2), pages 219-237, February.
    5. Chen, Li-Hsueh & Finney, Miles & Lai, Kon S., 2005. "A threshold cointegration analysis of asymmetric price transmission from crude oil to gasoline prices," Economics Letters, Elsevier, vol. 89(2), pages 233-239, November.
    6. Rietveld, Piet & van Woudenberg, Stefan, 2005. "Why fuel prices differ," Energy Economics, Elsevier, pages 79-92.
    7. Kaufmann, Robert K. & Laskowski, Cheryl, 2005. "Causes for an asymmetric relation between the price of crude oil and refined petroleum products," Energy Policy, Elsevier, vol. 33(12), pages 1587-1596, August.
    8. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    9. Duffy-Deno, Kevin T., 1996. "Retail price asymmetries in local gasoline markets," Energy Economics, Elsevier, pages 81-92.
    10. Giliola Frey & Matteo Manera, 2007. "Econometric Models Of Asymmetric Price Transmission," Journal of Economic Surveys, Wiley Blackwell, pages 349-415.
    11. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, pages 99-126.
    12. Wlazlowski, Szymon & Giulietti, Monica & Binner, Jane & Milas, Costas, 2009. "Price dynamics in European petroleum markets," Energy Economics, Elsevier, pages 99-108.
    13. Markus Arpa & Jesus Crespo Cuaresma & Ernest Gnan & Maria Antoinette Silgoner, 2006. "Oil Price Shock, Energy Prices and Inflation – A Comparison of Austria and the EU," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 53-77.
    14. Axel Dreher & Tim Krieger, 2010. "Diesel price convergence and mineral oil taxation in Europe," Applied Economics, Taylor & Francis Journals, vol. 42(15), pages 1955-1961.
    15. Asplund, Marcus & Eriksson, Rickard & Friberg, Richard, 2000. " Price Adjustments by a Gasoline Retail Chain," Scandinavian Journal of Economics, Wiley Blackwell, pages 101-121.
    16. Bacon, Robert W., 1991. "Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes," Energy Economics, Elsevier, pages 211-218.
    17. Chauvin, V. & Devulder, A., 2008. "An Inflation Forecasting Model for the Euro Area," Working papers 192, Banque de France.
    18. Kaufmann, Robert K. & Dees, Stephane & Gasteuil, Audrey & Mann, Michael, 2008. "Oil prices: The role of refinery utilization, futures markets and non-linearities," Energy Economics, Elsevier, pages 2609-2622.
    19. Severin Borenstein & A. Colin Cameron & Richard Gilbert, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 305-339.
    20. Rebekka Christopoulou & Philip Vermeulen, 2012. "Markups in the Euro area and the US over the period 1981–2004: a comparison of 50 sectors," Empirical Economics, Springer, pages 53-77.
    21. Hosken, Daniel S. & McMillan, Robert S. & Taylor, Christopher T., 2008. "Retail gasoline pricing: What do we know?," International Journal of Industrial Organization, Elsevier, pages 1425-1436.
    22. Galeotti, Marzio & Lanza, Alessandro & Manera, Matteo, 2003. "Rockets and feathers revisited: an international comparison on European gasoline markets," Energy Economics, Elsevier, pages 175-190.
    23. Al-Gudhea, Salim & Kenc, Turalay & Dibooglu, Sel, 2007. "Do retail gasoline prices rise more readily than they fall?: A threshold cointegration approach," Journal of Economics and Business, Elsevier, pages 560-574.
    24. Szymon Wlazlowski & Bjorn Hagstromer & Monica Giulietti, 2011. "Causality in crude oil prices," Applied Economics, Taylor & Francis Journals, vol. 43(24), pages 3337-3347.
    25. Oladunjoye, Olusegun, 2008. "Market structure and price adjustment in the U.S. wholesale gasoline markets," Energy Economics, Elsevier, pages 937-961.
    26. Banfi, Silvia & Filippini, Massimo & Hunt, Lester C., 2005. "Fuel tourism in border regions: The case of Switzerland," Energy Economics, Elsevier, pages 689-707.
    27. Abdulnasser Hatemi-J, 2008. "Tests for cointegration with two unknown regime shifts with an application to financial market integration," Empirical Economics, Springer, pages 497-505.
    28. Stephen P. A. Brown & Raghav Virmani, 2007. "What's driving gasoline prices?," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(oct).
    29. Murat, Atilim & Tokat, Ekin, 2009. "Forecasting oil price movements with crack spread futures," Energy Economics, Elsevier, pages 85-90.
    30. Pedro Duarte Neves & Paulo Soares Esteves, 2004. "Oil Prices and the Economy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    31. Chen, Shiu-Sheng, 2009. "Oil price pass-through into inflation," Energy Economics, Elsevier, pages 126-133.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Energy Prices Macroeconomy;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:31:y:2009:i:6:p:867-881. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eneco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.