Response of Italian Domestic Heating Oil Market to Variations in Crude Oil Costs: Symmetric or Asymmetric?

Fidelia N Onuigbo ,Jonathan E Ogbuabor

doi:10.7176/jetp/9-2-02

Abstract

This study examined the Italian domestic heating oil market for evidence of asymmetric price adjustment and rent-seeking following changes in crude oil costs. The study adopted the recently developed nonlinear autoregressive distributed lag (NARDL) modeling framework, and used monthly time series data for the period January 2005 to December 2015. The findings reveal that the speed of adjustment was sluggish at 17% all through, which is typical of markets witnessing irregular behaviours such as collusion and rent-seeking. The results further indicate the presence of short-run additive asymmetry at 5% level only at pump, which is consistent with the rockets and feathers effect. However, the results did not show any evidence of long-run asymmetry or long-run rent-seeking. Even in the short-run, the results did not reveal any pattern of rent-seeking. Thus, the study concludes that the presence of sluggish speed of adjustment and rockets and feathers effect in the pump prices raise serious anti-trust issues. Accordingly, the study recommends that the market should be continuously monitored so that the dominant status of retailers like the Eni brand is not abused, thereby leading to less competition and collusive behaviours. Keywords : Rockets and Feathers effect; Rent-seeking; Asymmetric Price Adjustment; Nonlinear ARDL model; Italy JEL Codes: Q43; D40; C22; N94. DOI : 10.7176/JETP/9-2-02

Highlights

Crude oil is the main input material in the production of several petroleum products such as domestic heating oil, automotive diesel, gasoline and industrial fuel oil
The adjusted R2, which has the values of 78% and 84% indicate that changes in crude oil costs account substantially for variations in the retail domestic heating oil prices in Italy, which is consistent with economic expectations
The findings reveal that the speed with which Italian domestic heating oil adjusts to changes in crude oil cost was www.iiste.org very sluggish

Summary

Introduction

Crude oil is the main input material in the production of several petroleum products such as domestic heating oil, automotive diesel, gasoline and industrial fuel oil. The monthly data of Swedish gasoline market during 1980 to 1996 was used by Asplund, Erikson and Friberg (2000) to explore the market They find support for the hypothesized asymmetry that the retail price is stickier downwards than upwards in response to oil cost shocks. The study adopted the econometric framework applied by GS13 in modeling the asymmetric price www.iiste.org 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

Conclusion and Policy Implications