Abstract
In the recent past, the world in general and Pakistan in particular faced a drastic fuel price change, affecting the economic productivity of the country. This has drawn the attention of empirical researchers to analyze the abrupt change in fuel prices. This study takes a lead and investigates for the first time, in the literature related to Pakistan, the presence of multiple fuel price bubbles, with the purpose of knowing if the price driver is due to demand or it is exuberant consumer behavior that prevails and contributes to a sudden boom in fuel price series. The empirical analysis is performed through a recently proposed state-of-the-art generalized sup ADF (GSADF) approach on six commonly used fuel price series, namely, LDO (light diesel oil), HSD (high-speed diesel), petrol, natural gas, kerosene, and MS (motor spirit). The bubble analysis for each of the six fuel price series is based on monthly data from July 2005 to August 2020. The findings provide evidence of the existence of multiple bubbles in all series considered. Specifically, four bubbles are detected in each of the kerosene and natural gas price series, whereas three bubbles are noted in each of the HSD, LDO, petrol and MS price series. The maximum duration of occurrence of bubbles is of 12 months for kerosene. The date-stamping of the bubbles shows that the financial crisis of 2008 contributed to the emergence of bubbles that pushed oil prices upward and caused a depreciation in the national currency.
Highlights
A bubble can be defined as a rapid increase in the price of a good, which increases due to the exuberant behavior of the consumer or the market
The results of this paper indicate that there are speculative episodes in the Brent oil price series, but not in the West Texas Intermediate (WTI) price series
Li and Chevallier [7] detected the presence of a bubble in the US, European, and Asian natural gas markets by using the generalized sup Augmented Dickey–Fuller (ADF) (GSADF) test, and the results indicate the presence of bubbles
Summary
A bubble can be defined as a rapid increase in the price of a good, which increases due to the exuberant behavior of the consumer or the market. Bubbles appear in the market when the investor invests in market assets, securities, goods and so forth, in the interest of profitability This rapid price increase is much more than the productive capacity or the actual value of an asset that no one on the market wants to buy. An increase in the price of oil leads to an increase in the cost of production, import bills, and price of petroleum goods, and a reduction in the production capacity of a country due to high input cost, which results in low demand, low investment as well as poor economic growth and lower purchasing power [2]
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