Are Unleaded Gasoline and Diesel Price Adjusmens Symmeric? A Comparison of Eurozone Reail Fuel Markes Selios Karagiannis Cenre of Planning and Economic Research (KEPE), Greece Yannis Panagopoulos Cenre of Planning and Economic Research (KEPE), Greece Prodromos Vlamis Cenre of Planning and Economic Research and Deparmen of Land Economy, Universiy of Cambridge, UK ABSTRACT The purpose of his paper is o examine he naure of price adjusmens in he gasoline markes of France, Ialy, Spain and Germany. We examine if crude oil prices are ransmied o he reail gasoline prices in he shor and long run and we es he symmery of adjusmen hypohesis. A disaggregaed general-ospecific model is applied for he esimaion of he inernaional crude oil price pass-hrough and esing he symmeric/asymmeric behaviour of he reail fuel markes in hese economies. Our resuls show ha rigidiies in he ransmission process are presen and variaions across he seleced Eurozone membersaes exis. The reail fuel prices speed of upward/downward adjusmen behaviour is considered as symmeric in all four economies analysed. Thus, our model has no accumulaed evidence o suppor he rockes and feahers hypohesis ha reail fuel prices rise faser han hey fall in response o changes in crude oil prices. We believe ha our resuls can be useful for he EU energy auhoriies and anirus policy makers in heir aemp o monior he compeiiveness of heir energy secors. JEL Classificaion: Q41, C22. Keywords: Crude oil prices pass-hrough, disaggregaed general-o-specific model Corresponding Auhor: pv214@cam.ac.uk 1
1. Inroducion Sandard macroeconomic exs ascerain ha here are boh aggregae demand and aggregae supply ransmission effecs from oil prices o economic aciviy. Oil is an imporan raw maerial in he producion process ha direcly affecs he cos of producion and consequenly he aggregae supply of goods 1. A change in oil prices also affecs he afer-ax income of households since he demand for ranspor fuels is very inelasic (due o he absence of direc subsiues). Thus, aggregae consumpion 2 and aggregae invesmen are affeced oo. Figure 1: Crude oil spo prices (US dollars per barrel) 100 90 80 70 60 50 40 30 20 10 0 1970 1971 Iranian revoluion Arab oil embargo Iran - Iraq war 1972 1973 1974 1975 1976 1977 1978 1979 Nominal price End of adminisraive pricing 1980 1981 1982 1983 1984 1985 1986 Invasion of Kuwai OPEC arge reducions, igh socks OPEC quoa increases, Asian financial crisis 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Real price, 1970 US dollars Source: OECD (2010) Economic, Environmenal and Social Saisics, OECD, Paris. Tigh spare capaciy, crude ouages in Nigeria, Iraq, Norh Sea Hurricanes Karina and Ria hi he US Gulf Coas Demand growh in China akes off Second Gulf crisis 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 The volailiy in inernaional crude oil prices since he early 1970 s (see Figure 1), global dependence on oil and OPEC, srong increase in oil demand from fas growing emerging economies like China, permanen oil shocks and heir effecs on economic growh and erms-of-rade have riggered a lo 1 The 1973 Arab oil embargo, which led o a surge in he price of oil from $1.84/barrel in 1972 o $10.77 in 1974 (see figure 1), was he major cause of a supply shock ha hi he world indusrialised economies and changed he erms-of-rade in favour of oil exporing counries. The end resul was a recession due o he reducion in he aggregae supply of goods and services and consequenly high unemploymen and high inflaion hroughou he 1970 s in oil imporing naions. 2 In he wake of he Iranian revoluion in 1979 and he sar of he Iran-Iraq war in 1980, oil prices rose o a high of nearly $40 (see Figure 1). More han a decade now he world crude oil prices, even when adjused for inflaion, have been almos seadily rising on a year-o-year basis and reached a hisorical peak jus under $150/barrel in July 2008. The key causes of his seady increase in oil prices beween 1998-2008 were he OPEC decision in 1999 o reduce oil socks, he expecaion of a second war in Iraq in 2003, he hi of he easern coas of he US Gulf of Mexico by he Hurricane Karina in lae Augus 2005 and he increased demand for oil by he emerging economies hroughou he 2005-2009 (OECD, 2010). These increases have affeced 2
of aenion inernaionally and sparked many researchers o observe he behavior of reail gasoline prices and analyze he oil price ransmission mechanism (Asche e al., 2003). For oil imporing counries, producer prices are exogenous o reailers locaed in he domesic economy. The adjusmen of reail fuel prices in response o changes in inernaional crude oil price is a fundamenal elemen of he oil price ransmission mechanism. If he oil price ransmission mechanism is efficien, any change in crude oil prices will be ransmied o reail fuel prices, ulimaely influencing boh aggregae domesic demand (hrough he afer-ax income of households and he aggregae consumpion) and oupu produced. For example, if here are price rigidiies in he unleaded gasoline marke, his will imply ha he paricular reail marke adjuss rapidly o rising crude oil prices bu slowly o declining crude oil prices (also known as he rockes and feahers hypohesis pioneered by Bacon (1991)). To his end, he regular monioring and assessmen of he oil price pass-hrough is criical for energy auhoriies and anirus policy makers in heir aemp o monior he compeiiveness of heir energy secors. In his paper, we firs es wheher he inernaional crude oil prices are ransmied o he reail fuel prices, ha is, diesel oil and unleaded gasoline. We hen examine he shor-run and long run rigidiies (elasiciies) beween crude oil prices and diesel as well as crude oil prices and unleaded gasoline, in France, Ialy, Spain and Germany. Second, we es he symmery of adjusmen hypohesis ha is wheher reail fuel price speed of adjusmen (o upward and downward crude oil price change) is symmeric or asymmeric. Third, in conjuncion wih his issue, we calculae how much ime (number of weeks) i akes for a given change in he crude oil prices o be fully ransmied o he reail fuel prices in he economies examined. One of he disincive feaures of our paper is ha we employ he disaggregaed general-o-specific model (hereafer GETS), which i offers a parsimonious modelling approach for separaing he price adjusmen mechanism ino a shor erm (direc) and a long-erm (indirec) componen and for significanly he price for gasoline ha consumers pay around he world and hus households afer-ax income. 3
disinguishing price asymmeries in reail fuel markes wihin he same pass-hrough dynamic model. To he bes of our knowledge, his sudy is he firs o assess he impac of crude oil price changes on reail fuel prices by using he disaggregaed GETS mehod. Second, he issue of pass-hrough has been concenraed on he US reail gasoline marke while here are only few sudies abou he major Eurozone economies. In he ligh of his, we provide new evidence on crude oil price ransmission and he issue of price asymmeries by using a recen daa se ha includes he French, Ialian, Spanish and German reail fuel markes. Finally, we give some explanaion of how symmery migh arise in hese markes by presening and discussing exensively he organizaional srucure of he oil indusry in he four major European indusrialized economies. An assessmen of he marke srucure for reail fuel producs in hese markes can provide a sronger basis for a criical discussion of our resuls. Our empirical resuls are mixed as far as i concerns boh he oil price ransmission process and pass-hrough compleeness; i is eviden ha rigidiies in he ransmission process, variaions across he counries analysed and non-compleeness a leas in some cases, are presen. The reail gasoline prices speed of upward/downward adjusmen behaviour is considered as symmeric in he economies analysed. Thus, our findings on he whole do no provide firm evidence ha crude oil price increases are passed along o he reail cusomer more fully and rapidly han he crude oil price decreases. The paper is srucured as follows. Secion 2 presens he lieraure review on crude oil price ransmission channel o reail fuel prices. In Secion 3 we briefly refer o he marke srucure for oil producs in France, Ialy, Spain and Germany. Secion 4 presens daa and he GETS economeric mehodology. The empirical resuls on esimaes of he speed of adjusmen and symmery of adjusmen hypohesis are given in Secion 5 and Secion 6 concludes he paper. 2. Lieraure Review The issue of crude oil price pass-hrough o reail fuel prices along wih he adjusmen process has 4
been examined by a number of scholars by looking a differen counries, for differen ime periods, wih differen frequency of daa, differen marke sages and differen economeric mehodologies applied. Some sudies concenrae on US reail gasoline marke. A non-exhausive lis of papers include Burbidge and Harrison (1984), Mork (1989), Karrenbrock (1991), Shin (1994), Duffy-Deno (1996), Borensein e al. (1997), Balke e al. (1998), Pelzman (2000), Borensein & Shepard (2002), Bachmeier, & Griffin (2003) and Radchenko (2005). Oher sudies ha focus on non-us economies include Bacon (1991), Manning (1991), Lanza (1991), Kirchgassner and Kubler (1992), Reilly and Wi (1998), Godby e al. (2000), Asplund e al. (2000), Beendorf e al. (2003), Galeoi e al. (2003), Meyler (2009) and Bermingham and O'Brien (2011). Bacon (1991), in his seminal paper on rockes and feahers, uses biweekly daa for he UK gasoline marke for he period 1982-1989 and finds evidence of an asymmeric price adjusmen process. Galeoi e al. (2003) focus on he issue of presumed asymmeries in he ransmission of shocks o crude oil prices ono reail prices of gasoline in seleced European counries (Germany, France, UK, Ialy and Spain) from 1985 o 2000, by using monhly daa. Their resuls.srongly confirm he emergence of widespread price asymmeries in he daa. (p.178). Meyler (2009) ess he symmery hypohesis for he welve iniial Euro member counries from 1994 o 2008, by using weekly daa and finds weak evidence of saisical significan asymmeries across he counries examined. Grasso and Manera (2007), esimae hree differen economeric models (namely asymmeric ECM, auoregressive hreshold ECM and ECM wih hreshold) on price asymmeries by using monhly daa for he gasoline markes of France, Germany, Ialy, Spain and he UK over he period 1985 2003. Evidence of long erm asymmeries exis in he direc changes of reail prices as compared o he change in he inernaional price of oil. Cleredes (2010) ess he response of reail gasoline prices (wih and wihou axes) o changes on he world oil price by using weekly daa for all EU 27 counies and finds significan variaion in he adjusmen mechanism across counries while evidence of asymmeric adjusmen is fairly weak. Finally, 5
Bermingham and O'Brien (2011), in a more recen sudy of he Irish and he UK liquid fuels marke, use hreshold auoregressive models, monhly daa for he period 1997-2008 and find no evidence o suppor he asymmeric price hypohesis. There is no consensus in he empirical lieraure wheher reail gasoline prices reflec decreases (drop like a feaher ) in inernaional producer prices as rapidly and fully as hey do price increases (rise like a rocke ). In oher words, evidence is inconclusive as far as i concerns he symmeric adjusmen of reail fuel prices o crude oil prices. Overall, findings of he lieraure differ from counry o counry depending mainly on he counry/regions examined, he ime period considered, he frequency of daa used and economeric mehods applied. I is difficul hough o assess wheher he variaion in findings across sudies is due o he daa se used or saisical mehodologies employed. A number of explanaions regarding he symmeric/asymmeric adjusmen of reail fuel prices o crude oil prices are presened in he relevan lieraure. Bacon (1991) provides wo explanaions regarding he slow response of gasoline prices o crude oil price changes, namely he relaive demand and he exchange rae explanaion. The former saes ha asymmeric adjusmens occur due o exogenous changes in demand for oil and he laer ha gasoline reail prices do no fully adjus o exchange rae changes. Borensein, Cameron, & Gilber (1997) argue ha marke power and oligopolisic coordinaion, ha is few dominan firms in he indusry are engaged in an unspoken collusion o mainain higher profi margins, can explain downward price rigidiies in he marke for gasoline. Balke, Brown & Yucel (1998) discuss he cusomer reacion explanaion, where cusomers reac srongly o reail fuel price increases if hey have he bargaining power o do so. They also argue ha asymmeric reacion in he gasoline price changes migh occur due o differences in accouning mehods in esimaing he value of he oil socks ha refiners possess. According o he cosly adjusmen hypohesis (Borensein & Shepard, 2002), levels of producion and invenories are cosly o aler and hus firms end o spread he adjusmen coss over ime. As far as i concerns he consumer search cos 6
hypohesis (Johnson, 2002), price differeniaion among gasoline reailers could differ due o heir spaial disribuion and he differen produc and services hey offer. Finally, Davis & Hamilon (2004) argue ha asymmeric adjusmen of gasoline prices could be parly aribued o he menu coss hypohesis, according o which here are cerain coss relaed o obain informaion regarding he opimum price. 3. Marke srucure for oil producs in France, Ialy, Spain and Germany 3.1 The French marke for oil producs The French marke for oil producs has a number of feaures. Firs, wih respec o he refinery marke, 13 plans operae in meropolian France plus several overseas. According o Inernaional Energy Agency (IEA, 2004), here are significan discrepancies beween refining capabiliies and demand, when considered on a produc-by-produc basis. In oher words, here is mismach in refining capaciy versus demands for producs in he French marke for oil producs. The presen discrepancy beween refining capaciy and domesic consumpion resuls in middle disillae impors and gasoline expors. Second, he French reail marke for gasoline oil consiss of reail oules (owned by oil companies) and hypermarkes. A he end of 2007, marke share for he reail oules and hypermarkes was around 44% and 56%, respecively. According o he Inernaional Energy Agency (IEA, 2009b), compeiion in he reail marke and he resuling decrease in reail price margins have forced he closure of numerous gasoline oil oules. In general, he reail marke for gasoline producs is considered o be highly compeiive. 3.2 The Ialian marke for oil producs The Ialian oil marke is fully liberalized as impors, expors, rade and prices are se wihou resrains (ΙΕΑ, 2009a). The governmen inervenes only o proec compeiion and o avoid abuse of dominan posiion. Disribuion in he marke is principally underaken by inegraed oil companies. Former sae oil company, Eni, mainains a dominan posiion in he Ialian refining oil secor. Currenly 7
he company has he larges share of he marke (30%). In addiion, here are hree foreign companies operaing in Ialy (Tamoil, Kuwai Peroleum and Lukoil), where heir combined marke shares of he Ialian reail disribuion and he wholesale marke is around 18% and approximaely 17%, respecively. In he disribuion marke for oil producs, compeiion is hampered o some exen by governmen inervenion in he marke. According o he Inernaional Energy Agency (IEA, 2003 & 2009a), here are persisen resricions on he enry condiions ino he marke for companies ha are no verically inegraed. This has led o an unsaisfacory degree of modernizaion of he disribuion nework, high reail prices and more generally an insufficien degree of compeiion in he marke a he expense of consumers. According o Ialian compeiion auhoriy barriers o he opening of new reail oules exis due o a number of legal definiions ha is mandaory minimum disances beween pumps and minimum areas designaed for commercial aciviies. According o he laes repor of he Inernaional Energy Agency (IEA, 2009a), alhough liberalizaion and marke reform have visibly had an impac on he wholesale markes for oil producs, work remains o be done as far as i concerns he necessary reform of he disribuion and reail secors. The Inernaional Energy Agency argues ha he sale of gasoline and diesel a reail gasoline saions is sill governed by oudaed legislaion, which has a negaive impac on reail prices and poenially hampers compeiion. 3.3 The Spanish marke for oil producs The Spanish oil marke is in a ransiion phase from a fully regulaed o a fully liberalized sysem according o he Inernaional Energy Agency (IEA, 2005). Spanish energy supply is provided by he privae secor in all areas of he oil marke, where he Naional Energy Commission (governmen agency) regulaes he naural monopoly aspecs of he energy sysem o ensure, for example, hird-pary access and ransparency by privae companies. The disribuion nework of Spain can be characerised as a quasi 8
monopoly. The Hydrocarbon Logisics Company has a dominan role in he disribuion nework, as i possesses around 25% of he marke. Spain is well served wih refineries, wih a oal capaciy ha is close o covering he overall Spanish demand for oil producs. Around 90% of he refining capaciy is in he hands of he wo companies namely RepsolYPF and Cepsa. These were esablished when he marke was liberalized in 1992. The Spanish reailing marke for oil produc can be divided ino direc sales and sales hrough filling saions (36% and 64% of he marke, respecively). According o IEA (2005), he profi margins for he dealers regarding sales of diesel in he filling saion marke is considered o be high, compared o oher European counries. One reason for his could be ha Spain has a relaively low densiy of filling saions compared o some oher counries in Europe due o local planning resricions. The reail marke is dominaed by RepsolYPF (3,616 saions, 41.6%) and Cepsa (1,550 saions, 17.8%). Inernaional Energy Agency (IEA, 2007b) characerizes he Spanish oil secor as heavily concenraed and here is a lack of new enrans despie he fac ha here are no considerable enry barriers. 3.4 The German marke for oil producs Germany s oil marke is fully liberalized and characerised by a relaively large number of marke paricipans. I should also be noed ha no governmen ownership exis in any secor of he counry s oil marke (refineries, disribuion nework, reailing). Nine companies are acive in he refining marke of oil, where hree of hem hold nearly 65% of he capaciy share. These are he Shell Deuschland Oil, he Deusche BP and he Toal Deuschland. Regarding he reail oil marke, he German governmen promoes he use of diesel in privae ranspor. Inernaional Energy Agency (IEA, 2007a) noes ha compeiion is acive in all secors of he German oil marke. 4. Daa and Economeric Mehodology Daa used for crude oil prices refer o weekly Europe Bren spo prices (FOB) and is colleced 9
from he U.S. Energy Informaion Adminisraion. Our analysis focus on wo ypes of reail producs; he unleaded (Euro 95) and diesel fuel prices. Weekly reail fuel prices (ne of ax) are colleced from Eurosa and he daa cover he period beween 7/01/2002 and 12/12/2011 for France, Ialy, Spain and Germany. All oil produc prices and were convered o Euro per 1000 lires, using he appropriae US Dollar/Euro exchange rae provided by he Inernaional Financial Saisics. Figures 1-5 (available in Appendix) presen he evoluion of crude oil prices and he reail fuel prices beween 7/01/2002 and 12/12/2011 for France, Ialy, Spain and Germany. As is i is eviden, inernaional crude oil price was raised by almos 105% beween January 2007 and he middle of 2008. Moreover reail fuel prices were characerized by high volailiy during he oil marke crisis in 2008. In Tables 1A and 1B (available in Appendix), we presen he weekly descripive saisics (average, minimum, maximum and sandard deviaion) for each ype of fuel in each counry beween 2002 and 2011. As i is shown in Table 1A, Spain has he highes average diesel oil price while Ialy has he highes average unleaded gasoline price. The pass-hrough lieraure is mainly relaed o he way crude oil price changes are ransmied o diesel and unleaded gasoline prices. A variey of economeric models have been used in he empirical lieraure on pass-hrough ransmission models. Such models mainly include he ECM (Engle and Granger, 1987), he Threshold Auoregressive model (Enders and Granger, 1998; Enders and Siklos, 2001) and he LSE-Hendry general-o-specific approach, known as GETS model (Hendry, Pagan and Sargan, 1984; Hendry, 1987; Hendry and Krolzig, 2005). A more recen discussion of he GETS mehodology as well as of oher economeric approaches on how o esimae shor and long-run economic relaionships (he co-inegraing vecor error correcion model and he vecor auoregression approach) is given by Rao (2007). Cramon-Taubadel (Von) and Loy (1997), Cramon-Taubadel (Von) (1998), Cramon- Taubadel (Von) and Meyer (2000) inroduced he symmeric/asymmeric error correcion approach hrough an ex-ane disaggregaion of daa. Wihin his framework, Bachmeier and Griffin (2003), Rao and Rao (2008), presened an alernaive dynamic approach, known as he disaggregaed GETS model, 10
originaing from he LSE-Hendry GETS mehodology, which has more inuiive appeal. The main advanage of he model is ha wo differen speeds of adjusmens, for posiive and negaive change in he variables included, can simulaneously be esimaed. In our case, i allows for he reail oil prices and he speed of adjusmen coefficiens o be analysed separaely, when he producer oil prices are increasing or decreasing. The disaggregaed GETS mehodology, wih an embedded asymmery, is implemened in hree seps. Firs, he equilibrium (long run) relaionship is esimaed by regressing he reail fuel prices on he inernaional crude oil price (equaions 1a and 1b). UNL Oil 0 1 (1a) DSL Oil 0 1 (1b) UNLsands for he premium unleaded gasoline price, DSL sands for he diesel price,oil sands for he crude oil prices, 1 and 1measure he long-run impac of he reail fuel prices o a 1 increase in he inernaional crude oil price (long-run pass-hrough or long run elasiciies) and and are he wo error erms. The residuals from he wo regressions ( e andu ) represen deviaions from he long-run equilibrium. The second sep specifies he change in reail fuel prices as a funcion of he change in inernaional crude oil price, of pas changes in reail prices and of deviaions from he long run equilibrium (he residuals e and u from he firs sep). Based on a simple error correcion model, he regression residuals e and u from equaions 1a and 1b are plugged ino equaions 2a and 2b and in his way we end up wih he following shor run dynamic oil adjusmen equaion. UNL n n i UNL i i Oil i 1 e 1 i1 i0 (2a) 11
DSL n n i DSL i i Oil i 2 u 1 i1 i0 (2b) The Greek leer Δ sands for firs difference operaor, i, i i and i are he shor-run elasiciies and show he direc effec or shor-run impac of changes in crude and reail oil prices, 1 and 2 are he coefficiens of he speed of adjusmen o he long run equilibrium and ξ and ν are he error erms of he wo shor run dynamic oil adjusmen equaions. The speed of adjusmen coefficiens should be negaive since i is expeced ha any deparure from he equilibrium posiion in he immediae pas period will be offse in he curren period by 1 and 2 proporion. The model also includes lagged changes in reail fuel prices and DSL i in order o allow for he possibiliy of previous reail price changes affecing UNL i curren pricing decisions. The hird sep involves he deerminaion of a shor run dynamic adjusmen equaion for reail unleaded and diesel prices, wih an embedded asymmery (disaggregaed GETS model), which allows all of he coefficiens in equaion 2a and 2b o differ depending on wheher he change in he inernaional crude oil price is posiive or negaive. Rao and Rao (2008) provide a complee derivaion, formulaion and discussion of he specificaion of an asymmeric adjusmen equaion. This is a varian of equaions 2a and 2b and can ake he following form: j1 UNL = R, i UNL i + W i1 j2 i0, i Oil i + 1 ( UNL - 0-1 Oil ) -1 + j3 + i0 W, i j4 Oil i + i1 UNL i+ ( UNL - 0-1 Oil ) -1 + R, i 1 T + (3a) j1 DSL = i1 R, i j2 DSL i + i0 W, i Oil i + ( DSL - 0 1 Oil ) -1 + 2 12
j3 + i0 W, i j4 Oil i + i1 R, i DSL i + 2 ( DSL - 0 1 Oil ) -1 + T + (3b) In equaions 3a and 3b, θ 1 +, θ 2 + are he speed of adjusmen coefficiens when crude oil price increases and - - 1 and θ 2 are he speed of adjusmen coefficiens when crude oil price decreases. These coefficiens capure he error correcion adjusmen speed when he reail fuel prices are away from heir equilibrium. In oher words, hese coefficiens show how fas deparures from he equilibrium posiion in he pas period will be offse in he curren period. They are expeced o be negaive because if he price of he previous period was above is long-run level ( e 1 and u 1 are posiive) in he curren period i is expeced o fall in order o resore he long-run relaionship. Moreover, β w,0 + and β w,0 - are he coefficiens of he immediae shor-erm pass-hrough and are expeced o be posiive as hey capure he response of he reail fuel prices o a change in he inernaional crude oil price. These coefficiens measure he shor-run impac of changes in crude oil prices or how much of he change in crude oil prices ges refleced in he reail fuel prices in he same period. T is he ime rend. The e 1 and u 1 parameers in equaion 2a and 2b are replaced wih heir equivalen ( UNL - 0-1 Oil ) -1 in equaion 3a and ( DSL - 0 1 Oil ) -1 in equaion 3b. The former and he laer are he error correcion erms of he GETS model and can be hough as he measure of pas period deparure from he equilibrium. Rao and Rao (2008) poin ou ha he coefficiens and variables in equaion 3a and 3b wih he superscrip (+) are relevan when inernaional crude oil prices increase and wih he superscrip ( ) are relevan when inernaional crude oil prices fall. In oher words, for any posiive change in he independen variable (ΔOil >0), a corresponding response of all posiive coefficiens (β + w,, 1 ) is expeced. On he oher hand, he corresponding negaive coefficiens (β - w,, ) are 2 1 2 assumed o respond in any negaive change of he independen variable (ΔOil <0). Before applying he disaggregaed GETS model o our daase, we discuss wheher i is necessary 13
o es for he number of co-inegraed vecors beween he dependen and he independen variables. Rao e al. (2010) argue ha coinegraion echniques and GETS are observaionally equivalen bu GETS based on he classical mehods is simpler o use and well suied for he purpose of esing heories (p. 697). Moreover, Hendry 3 repeaedly saed ha if he underlying economic heory is correc, hen he variables in he levels mus be co-inegraed and, herefore, a linear combinaion of he I(1) levels of he variables mus be I(0). As his approach holds for he GETS model (ha is he model is based on he assumpion of a sable long-run relaionship beween he inernaional crude oil price and he reail fuel prices), i does no need o be pre-esed for coinegraion. Neverheless, we follow Johansen (1995) in order o es for uni roo and co-inegraion in our daa series. Prior expecaion ha crude oil prices and reail fuel prices, should be I(1) in heir levels, as mos macroeconomic variables are, is confirmed for all series examined by using augmened Dickey and Fuller es 4. The number of he exising co-inegraing vecors from he Johansen s mehodology, is sensiive o he number of lagged variables ( n ) of he iniial vecor (Johansen, 1995). Due o his sensiiviy he following lag selecion crieria are implemened; he modified Likelihood Raio es saisic, he Final Predicion Error es, he Akaike, he Schwarz and finally he Hannan-Quinn informaion crieria. Resuls for he opimal lag srucure of equaions 3a and 3b in he four differen counries are presened in he Appendix (Table 2-3). We find ha he opimal lag lengh in all four differen counries is hree and wo, when he dependen variable is he unleaded and diesel reail fuel price, respecively. These resuls demonsrae ha he opimal lag lengh is robus o he use of differen lag selecion crieria. According o he Eigenvalue and Trace ess from he Johansen s mehodology, in all bi-variae cases here is a unique co-inegraed vecor of order 1 (r=1), which suppors he hypohesis 3 See Hendry, Pagan, and Sargan (1984), Hendry (1987) and Hendry and Krolzig (2005). 4 Augmened Dickey and Fuller resuls for uni roo ess are available upon reques from he auhors. 14
ha all series examined end o co-inegrae pair wise 5. Finally, The GETS specificaions in equaion 3a and 3b allow for he presence of auoregressive lags. Therefore, we provide evidence ha he error srucure of he esimaed equaions does no presen serial correlaion (see Table 4-5 in he Appendix) and ha our economeric resuls are robus o misspecificaion. 5. Empirical Resuls The disaggregaed GETS mehodology is applied and equaions 3a and 3b are esimaed separaely for each counry and each ype of reail fuel by using ordinary leas squares (OLS) and he non-linear leas squares mehods (NLLS) 6. The OLS and NLLS esimaes are compared and giving similar resuls. We hus presen here NLLS esimaes and OLSs are available from he auhors upon reques. In order o enhance readabiliy and o conserve space we repor here only he main parameers of ineres from he GETS regression in ables 1-4 below. 5.1. Speed of Adjusmen Esimaes and he Degree of Pass-Through Compleeness in he shor and long-erm Firs, for all four Eurozone economies, he coefficiens of he error correcion erm prices increase) and (when (when prices fall) are negaive (as expeced) and saisically significan when boh reail unleaded (see Table 1, column 1 and 2) and diesel (see Table 2, column 1 and 2) are used as he dependen variables. This means ha crude oil price increases and decreases are ransmied o he reail unleaded and diesel prices in he long erm. 5 Eigenvalue and Trace ess for co-inegraion are available upon reques from he auhors. 6 In economeric erms he corresponding acivaion will be riggered in equaions 3a and 3b wih he help of a dummy variable. More specifically, all posiive coefficiens will ake he value of 1, when a posiive change in he dependen variable occurs, and will be zero oherwise. 15
Table 1: The GETS pass-hrough esimaes: Unleaded unleaded Posiive Speed of Adjusmen (θ + ) Germany -0.17 (-4.92) France -0.11 (-4.71) Ialy -0.10 (-4.49) Spain -0.10 (-4.70) Noe: -saisics in parenheses Negaive Speed of Adjusmen (θ - ) -0.09 (-2.24) -0.10 (-3.79) -0.12 (-4.82) -0.07 (-3.59) Immediae (Shor run) Posiive passhrough (β + ) 0.50 (5.55) 0.45 (10.23) 0.25 (7.83) 0.33 (10.5) Immediae (Shor run) Negaive pass-hrough (β - ) 0.59 (7.24) 0.30 (7.46) 26 (7.84) 0.25 (7.57) Posiive Mean adjusmen lag of a complee passhrough (ψ 1- β + )/θ + Negaive Mean adjusmen lag of a complee passhrough (ψ 1- β - )/θ - 1.41 1.66 2.54 4.30 3.20 2.58 2.80 5.14 Long run passhrough (ψ 1) 0.74 (18.1) 0.73 (20.2) 0.57 (19.6) 0.61 (19.8) For example, esimaes for Germany indicae ha if he unleaded fuel price is above is long-run level, i will reurn o ha level by making up 17% of he difference each week. If he unleaded fuel price is below is long-run level, i will reurn o ha level by making up 9% of he difference each week. Table 2: The GETS pass-hrough esimaes for Diesel reail fuel price Diesel Posiive Speed of Adjusmen (θ + ) Germany -0.17 (-6.07) France -0.07 (-5.87) Ialy -0.05 (-5.62) Spain -0.06 (-5.51) Noe: -saisics in parenheses Negaive Speed of Adjusmen (θ - ) -0.15 (-5.56) -0.07 (-5.44) -0.04 (-4.60) -0.06 (-5.20) Immediae (Shor run) Posiive passhrough (β + ) 0.51 (6.21) 0.51 (12.11) 0.32 (9.87) 0.36 (11.0) Immediae (Shor run) Negaive pass-hrough (β - ) 0.39 (4.77) 0.27 (6.46) 0.23 (7.40) 0.20 (6.27) Posiive Mean adjusmen lag of a complee passhrough (ψ 1- β + )/θ + Negaive Mean adjusmen lag of a complee passhrough (ψ 1- β - )/θ - 1.88 2.93 6.14 9.57 10.0 14.7 7.66 10.33 Long run passhrough (ψ 1) 0.83 (18.8) 0.94 (17.5) 0.82 (15.1) 0.82 (17.9) Second, we nex examine he degree of pass-hrough compleeness beween crude oil prices and reail unleaded and diesel in he shor-erm (wihin one week). The immediae shor-erm pass-hrough coefficiens, β w,0 + (capures he response o a posiive shock) and βw,0 - (capures he response o a 16
negaive shock) are posiive (as expeced) and saisically significan for boh unleaded gasoline (see Table 1, column 3 and 4) and diesel (see Table 2, column 3 and 4) in all four economies. Taking Germany as an example, he esimaes sugges ha when he inernaional crude oil price increases by 1 cen (per lire), he unleaded fuel price will increase wihin one week by 0.50 cens and diesel oil by 0.51 cens. Also, he esimaes sugges ha when he inernaional crude oil price decreases by 1 cen (per lire), he + unleaded fuel price will decrease wihin one week by 0.59 cens and diesel oil by 0.39 cens. Finally, β w,0 - is higher han β w,0 in all counries regarding he diesel oil price. This implies ha he immediae shorerm impac of an increase in crude oil prices is sronger han he shor-run impac of a decrease in crude oil prices in he same period. Third, we calculae he mean adjusmen lag of a complee pass-hrough for each counry and each ype of reail fuel separaely (for unleaded fuel see Table 1, column 5 and 6 and for diesel see Table 2, column 5 and 6). The mean adjusmen lag of a complee pass-hrough ells us how much ime (number of weeks) i akes for a given change in he crude oil prices o be fully ransmied o he reail fuel prices. Taking Germany as an example, our calculaions sugges ha when he inernaional crude oil price increases by 1 cen (per lire), his change will be ransmied fully o he unleaded fuel price wihin 1.41 weeks and o he diesel price wihin 1.88 weeks. Also, our calculaions sugges ha when he inernaional crude oil price decreases by 1 cen (per lire), his change will be ransmied fully o he unleaded fuel price wihin 1.66 weeks and o he diesel price wihin 2.93 weeks. Lasly, we examine he degree of pass-hrough compleeness beween crude oil prices and reail unleaded and diesel in he long erm. The coefficiens φ 1 (in equaion 3a) and ψ 1 (in equaions 3b) measure he degree of pass-hrough compleeness in he long-run. I shows he amoun by which he reail fuel price will increase in he long-run in response o an increase of one uni (for example 1 cen per lire) in he inernaional crude oil price. The long-run adjusmen is complee when φ 1 =1 and ψ 1 =1, which implies ha changes in crude oil prices will be ransmied fully o reail fuel prices in he long run. The 17
long run crude oil pass-hrough, when unleaded reail fuel price is used (see Table 1, column 7), is nearly complee for France and Germany (0.73 and 0.74, respecively) and raher incomplee for Spain and Ialy (0.61 and 0.57, respecively). Furhermore, when diesel is he reail fuel price (see Table 2, column 7), he long run elasiciy is 0.94, 0.83, in France and Germany, respecively and 0.82 for boh Spain and Ialy. This indicaes ha he long run adjusmen for all four counries is almos complee in he long run. 5.2. Tesing for symmeric speed of adjusmen o equilibrium for reail fuel prices We now consider wheher he rae of adjusmen of reail fuel prices o increases and decreases of he inernaional crude oil prices is he same for each counry and each ype of reail fuel separaely. More specifically, we es he symmery of adjusmen hypohesis, ha is = (Rao and Rao, 2008, Karagiannis e al., 2010 and 2011). The exisence of a symmeric speed of adjusmen is esed by using he Wald (χ2) es 7. When eiher unleaded gasoline or diesel are he reail fuel prices, he Wald es indicaes ha he null hypohesis ha he wo speed of adjusmen coefficiens and are equal, could no be rejeced a he 5% significance level. The compued es saisic χ 2 for all four counries regarding he unleaded gasoline and diesel fuel prices are presened in Tables 3 and 4, respecively. Table 3: Tesing for symmeric/asymmeric speed of adjusmen o equilibrium: Unleaded reail fuel price counry Symmery Hypohesis H 0 : θ + = θ - Wald ( χ 2 ) empirical values Resul Germany 2.45 symmery France 0.31 symmery Ialy Noe: We es he symmery hypohesis by applying he Wald (χ 2 ) es. The criical value of χ 2 saisic wih one degree of freedom is 3.84 (a 5% confidence level) and 5.02 (a 2.5% confidence level). 0.44 symmery Spain 1.56 symmery 7 The criical value of 2 saisic wih one degree of freedom is 5.02 (5% confidence inerval). 18
Table 4: Tesing for symmeric/asymmeric speed of adjusmen o equilibrium: Diesel reail fuel price counry Symmery Hypohesis H 0 : θ + = θ - Wald ( χ 2 ) empirical values Resul Germany 0.60 symmery France 0.51 symmery Ialy 4.13 Symmery ( a 5% confidence level )/ posiive asymmery (a 2.5% confidence level Spain 0.28 symmery Noe: We es he symmery hypohesis by applying he Wald (χ 2 ) es. The criical value of χ 2 saisic wih one degree of freedom is 3.84 (a 5% confidence level) and 5.02 (a 2.5% confidence level). I is eviden ha we could no rejec he null hypohesis ha = when esed separaely for each counry and each ype of reail fuel. Our resuls are in line wih Bachmeier & Griffin (2003) and consisen wih our analysis in Secion 3 regarding he increased levels of compeiion in he reail oil markes for he economies considered. In addiion, his symmeric behavior presened in he seleced Eurozone reail fuel markes is heoreically consisen wih he cusomer reacion hypohesis (Balke, Brown & Yucel, 1998), where cusomers are expeced o reac srongly o reail fuel price increases if hey have he bargaining power o do so. Neverheless, as Pelzamn (2000) argues, symmery iself is no a proof of a compeiive marke because any marke power ha migh exis a he reail level migh be relaed o he cos of produc differeniaion mos in he form of locaion differences. 6. Conclusions The issue of crude oil price pass-hrough o reail gasoline prices along wih he adjusmen process has been examined by a number of scholars, who look a differen counries for differen ime periods, use differen frequency of daa and apply differen economeric mehods. Overall, here is no consensus in he empirical lieraure wheher reail gasoline prices reflec decreases in inernaional oil prices as rapidly and fully as hey do price increases. Our sudy invesigaes a number of ineresing issues. Firs, we es wheher he shor and long run oil price ransmission process works beween crude oil and reail fuel prices. Second, we es he symmery of adjusmen hypohesis separaely for each counry 19
and each ype of reail fuel. Lasly, we calculae how much ime (number of weeks) i akes for a given change in he inernaional oil prices o be fully ransmied o he reail fuel prices in he economies examined. The empirical resuls are mixed regarding he price ransmission process and he pass-hrough compleeness. We show ha rigidiies in he long run ransmission process are presen; variaions across he four counries exis as well as non-compleeness, a leas in some cases. Symmery seems o prevail in all counries analysed regarding he reail fuel markes. Therefore, we do no find evidence in suppor of he rockes and feahers phenomenon reflecing he noion ha reail fuel prices rise like a rocke and drop like a feaher in response o inernaional oil price changes. Symmery findings migh be perceived as he end resul of an effecive regulaory policy of he energy secor in hese economies. This is no surprising since he regulaory auhoriies of he developed counries of our daase do no face any serious difficulies in implemening and enforcing regulaion in heir reail oil markes. We believe ha our findings abou he naure of price adjusmens in he reail diesel and unleaded gasoline markes in France, Ialy, Spain and Germany, can be useful for he regulaory energy auhoriies and anirus policy makers in heir aemp o monior he compeiiveness of oil markes and enforce regulaion policy. In his paper we only relae in a single sage he price of crude oil o he pump price. Nex in our research agenda is o idenify a wha sage of he supply chain (producer, wholesale and reail) price asymmeries migh arise and analyse hem in boh sages of he ransmission chain separaely; as oil is moving from he oil field o he reail gasoline oule. References Asche, F., Gjolberg, O. & Volker, T. (2003) Price relaionships in he peroleum marke: an analysis of grude oil and refined produc prices, Energy Economics, 25, pp. 289-301. Asplund, M., Eriksson, R., Friberg, R., 2000. Price adjusmen by a gasoline reail chain. Scandinavian Journal of Economics, 102, 101 121. 20
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Appendix Table 1A: Descripive saisics for Diesel prices, 7/2/2002 12/12/2011 (in Euros) mean s. dev. min max France 0.450 0.141 0.237 0.787 Ialy 0.481 0.145 0.290 0.850 Spain 0.493 0.144 0.272 0.834 Germany 0.462 0.139 0.232 0.803 Table 1B: Descripive saisics for Unleaded prices, 7/2/2002 12/12/2011 (in Euros) mean s. dev. min max France 0.421 0.1266 0.222 0.682 Ialy 0.481 0.119 0.282 0.723 Spain 0.458 0.122 0.258 0.728 Germany 0.428 0.118 0.194 0.748 Figure 1: France Figure 2: Ialy.9.9.8.8.7.7.6.6.5.4.5.3.4.2.3.1 2002 2004 2006 2008 2010.2 2002 2004 2006 2008 2010 Unleaded Diesel Diesel Unleaded Figure 3: Spain Figure 4: Germany.9.9.8.8.7.7.6.6.5.5.4.4.3.3.2.2 2002 2004 2006 2008 2010.1 2002 2004 2006 2008 2010 Diesel Unleaded Unleaded Diesel 24
.6 Figure 5: Monhly Crude Oil Prices * in Euros/Lier (2002-2011).5.4.3.2.1 7/5/02 5/2/03 3/5/04 1/7/05 11/4/05 9/1/06 7/6/07 5/2/08 3/6/09 1/1/10 11/5/10 9/2/11 * Crude oil prices refer o Europe Bren Spo Price (FOB). Source: U.S. Energy Informaion Adminisraion (EIA) 25
Table 2: Lag selecion crieria when Unleaded is he Dependen Variable 1 counry Number of lags seleced Crieria Germany 3 LR, FRE, AIC France 3 LR, FRE, AIC, HQ Ialy 3 FRE, AIC, HQ Spain 3 FRE, AIC, HQ Table 3: Lag selecion crieria when Diesel is he Dependen Variable 1 counry Number of lags seleced Crieria Germany 2 LR, SC, HQ France 2 LR, FRE, AIC, SC, HQ Ialy 2 LR, FRE, AIC, SC, HQ Spain 2 LR, FRE, AIC, SC, HQ 1 Equaion 3a is esed for opimal lag srucure by implemening he modified Likelihood Raio es (LR), he Final Predicion Error es (FRE), he Akaike Informaion Crierion (AIC), he Schwarz Informaion Crierion (SC) and he Hannan-Quinn informaion crierion (HQ). Table 4: LM es for Serial correlaion: Diesel reail fuel price 2 counry H 0: No serial correlaion hypohesis χ 2 empirical values Resul Germany 2.35 Accep France 6.58 Accep Ialy 1.73 Accep Spain 5.90 Accep Table 5: LM es for Serial correlaion: Unleaded reail fuel price 2 counry H 0: No serial correlaion hypohesis χ 2 empirical values Resul Germany 5.32 Accep France 14.5 Rejec Ialy 11.49 Accep (a 2.5% confidence level) Spain 6.60 Accep 2 LM(5) = x 2 2 (5) and he criical value of x saisic wih five degrees of freedom is 11.07 (a 5% confidence level) and 12.83 (a 2.5% confidence level). 26