Oil Spill(over)s: Linkages in Petroleum Product Pricing Policies in West African Countries

Abstract

The volatility in international oil prices has important implications for policies that determine national retail prices of petroleum products. This paper addresses a number of issues regarding petroleum product pricing in Western Africa emphasizing international spillovers that may limit the ability of policymakers to adopt first best policies. We use panel unit root rests and long-run modelling based on vector error correction models to assess links and convergence in petroleum product prices across countries. Our results indicate that in general over the long-run there is convergence in prices across countries. Furthermore, the estimation results for models including gasoline and diesel prices suggest the presence of economically important spillovers with long run multipliers varying significantly according to the country groupings and econometric specifications considered. In contrast, the econometric results for kerosene prices not only indicate a weaker link between prices across countries, but also a much slower adjustment to equilibrium. In light of these important spillovers, the need to better coordinate pricing and tax policies towards petroleum products at the regional level becomes apparent.