Is Japanese Retail Industrial Fuel Oil Price Stickier Downwards Than Upwards in Response to Oil Cost Shocks?

Fidelia N Onuigbo ,Jonathan E Ogbuabor

doi:10.7176/jesd/10-4-15

Abstract

This paper examined the Japanese industrial fuel oil market for evidence of asymmetric price adjustment and rent-seeking following changes in crude oil prices. The study used the nonlinear autoregressive distributed lag (NARDL) modeling framework and monthly time series data for the period January 2005 to December 2015. The results indicate that Japanese industrial fuel oil market is fraught with sluggish speed of adjustment, which is typical of markets witnessing uncompetitive pricing and other irregular behaviours by retail firms. The results further indicate that Japanese industrial fuel oil market is bedeviled by the problem of short-run asymmetric price transmission from crude oil market, which is consistent with the rockets and fathers effect. However, the results did not show any evidence of rent-seeking since the observed short-run asymmetry is not obscured at pump. In view of the prevailing problem of rockets and feathers effect, the paper supports policies that will encourage continuous monitoring of the market in order to preserve competition and the overall social welfare. Keywords : Rockets and Feathers effect; Rent-seeking; Asymmetric Price Adjustment; Nonlinear ARDL model; Japan JEL Codes: Q43; D40; C22; N94. DOI : 10.7176/JESD/10-4-15

Highlights

Japan is primarily dependent on the Middle East for its crude oil imports as 83% of Japanese crude oil imports originated from the Middle East in 2012
The results indicate that asymmetric adjustments in retail gasoline and diesel prices are common, and that the adjustments are a type of politico-economic asymmetry
Conclusion and policy implications This paper examined the Japanese industrial fuel oil market for evidence of asymmetric price adjustment and rentseeking following changes in crude oil prices

Summary

Introduction

Japan is primarily dependent on the Middle East for its crude oil imports as 83% of Japanese crude oil imports originated from the Middle East in 2012. Majority of the studies focused on the United States, United Kingdom or some selected Eurozone countries To address these gaps, this paper contributes to the empirical literature on asymmetric price transmission of changes in crude oil costs to retail energy products with particular emphasis on Japanese industrial fuel oil market. This study adopted the econometric framework applied by GS13 in modeling the asymmetric price transmission in the UK retail energy sector, which was initially advanced by Shin, Yu and Greenwood-Nimmo (2013) for modeling asymmetric cointegration and dynamic multipliers in a non-linear autoregressive distributed lag (NARDL) framework Under this framework, short-run and long-run non-linearities were introduced through positive and negative partial sum decompositions of the 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 Banerjee et al (1998) are reported in this study

Empirical results and discussion

Findings

Conclusion and policy implications