Abstract
With the frequent fluctuations of international crude oil prices and China’s increasing dependence on foreign oil in recent years, the volatility of international oil prices has significantly influenced China domestic refined oil price. This paper aims to investigate the transmission and feedback mechanism between international crude oil prices and China’s refined oil prices for the time span from January 2011 to November 2015 by using the Granger causality test, vector autoregression model, impulse response function and variance decomposition methods. It is demonstrated that variation of international crude oil prices can cause China domestic refined oil price to change with a weak feedback effect. Moreover, international crude oil prices and China domestic refined oil prices are affected by their lag terms in positive and negative directions in different degrees. Besides, an international crude oil price shock has a significant positive impact on domestic refined oil prices while the impulse response of the international crude oil price variable to the domestic refined oil price shock is negatively insignificant. Furthermore, international crude oil prices and domestic refined oil prices have strong historical inheritance. According to the variance decomposition analysis, the international crude oil price is significantly affected by its own disturbance influence, and a domestic refined oil price shock has a slight impact on international crude oil price changes. The domestic refined oil price variance is mainly caused by international crude oil price disturbance, while the domestic refined oil price is slightly affected by its own disturbance. Generally, domestic refined oil prices do not immediately respond to an international crude oil price change, that is, there is a time lag.
Highlights
As an important raw material and energy source in the global industrial economy, petroleum has been playing a key role in promoting the development of the global economy and society (Timilsina 2015)
International crude oil prices and China domestic refined oil prices are affected by their lag terms in positive and negative directions in different degrees
According to the variance decomposition analysis, the international crude oil price is significantly affected by its own disturbance influence, and a domestic refined oil price shock has a slight impact on international crude oil price changes
Summary
As an important raw material and energy source in the global industrial economy, petroleum has been playing a key role in promoting the development of the global economy and society (Timilsina 2015). There is a longterm stable relationship between China domestic and international crude oil prices in the quantitative analysis of the price variation during the period of January 1997 to December 2004 (Jiao et al 2004). Conclusions have been reached that the transmission and feedback mechanism between prices of crude oil and retail refined oil is currently unavailable through an empirical study based on the vector autoregression (VAR) model (Jiang 2013). This paper aims to investigate the transmission and feedback mechanisms between international crude oil prices and China’s refined oil from January 2011 to November 2015 by using a Granger causality test, the vector autoregression model, an impulse response function and variance decomposition methods.
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