Asymmetric Impact of Crude Oil Cost on Diesel Price in Canada: Evidence from Nonlinear ARDL Model

Fidelia N Onuigbo ,Jonathan E Ogbuabor

doi:10.7176/jesd/10-4-14

Abstract

This paper examined the retail diesel market in Canada for evidence of asymmetric price adjustment and rent-seeking arising from the fluctuations in crude oil prices over the period January 2005 to December 2015. The study used the recently introduced nonlinear ARDL model. The findings indicate sluggish speed of adjustment of 22% for both ex-tax prices and pump prices, which is typical of markets witnessing weak competition and prolonged periods of mispricing. However, the results further indicate that Canadian consumers of retail automotive diesel are sufficiently insulated from the fluctuations of the international crude oil market since the estimated long-run coefficients ranged between 0.60 and 0.69. At the 5% level, the results did not show significant evidence of long run asymmetry in the retail diesel market. In addition, the results did not indicate significant short run additive asymmetry at the 5% level or the prevalence of the rockets and feathers effect. The absence of the rockets and feathers effect also means that the market is free from the problem of rent-seeking by retailers. This is desirable and indicates that regulatory policies should continuously monitor the market in order to preserve competition and the overall social welfare. Keywords : Asymmetric Price Adjustment, Rockets and Feathers Effect, Nonlinear ARDL Model, Canada. JEL Codes: Q43; D40; C22; N12 DOI : 10.7176/JESD/10-4-14

Highlights

IntroductionGS13 used the nonlinear ARDL framework to examine the United Kingdom (UK) gasoline, diesel, kerosene and gas oil markets over the period January 1999 to March 2013
The study used the nonlinear autoregressive distributed lag (NARDL) model which was estimated in its error correction form to capture both long-run relationships and short-run dynamics
The results indicate that the speed of adjustment is sluggish, which is typical of markets witnessing weak competition, extended periods of mispricing, and other collusive behavior that are detrimental to consumers’ welfare

Summary

Introduction

GS13 used the nonlinear ARDL framework to examine the UK gasoline, diesel, kerosene and gas oil markets over the period January 1999 to March 2013 They found evidence in support of the presumed asymmetry, which is largely obscured at pump where prices include both tax and duty suggesting the possibility of firms using tax system to conceal rent-seeking behavior. Atil, Lahiani and Nguyen (2014) used the recently developed nonlinear autoregressive distributed lags (NARDL) model to examine the pass-through of crude oil prices into gasoline and natural gas prices This approach allowed the study to simultaneously test the short-and-long-run non-linearities through positive and negative partial sum decompositions of the predetermined explanatory variables. The result of cointegration tests based on the bounds testing approach of Pesaran, Smith and Shin 2001 ( PSS) and the t-BDM statistic of Banajee et al (1998) are reported in this study

Empirical results and discussion

Conclusion and policy implications