Diversification of Crude Oil Import Sources as Determinant Factors in the Pricing of Petroleum Products

Abstract

This article aims to examine the determinant factors in the pricing of petroleum products in Korea. The study is designed to test whether the world crude oil price and the diversification of crude oil import sources determine the price of gasoline, diesel, and kerosene by using the two-factor arbitrage pricing theory model used in the field of finance. The main test results from the study are as follows. First, the prices of all petroleum products have a negative relationship with the world crude oil price and have an inverse relationship with the diversification of crude oil import sources. Second, the evidence indicates that the prices of all petroleum products are determined by the risk premium of two factors. This study contributes to the literature by introducing an international trade condition—diversification—in order to explain petroleum product pricing by using the econometric model derived from financial economics.