Is the transmission of crude oil prices to gasoline prices asymmetric?

Abstract

This paper provides evidence based on French macroeconomic data, that shocks on the cost of oil inputs are transmitted asymmetrically to the prices of fuel. We use an error correction model to estimate the dynamics of the transmission of the cost of crude oil expressed in French currency, to the production and before taxes retail prices of several kinds of fuel. We simulate the responses of the production and retail prices to positive as well as negative shocks affecting the cost of crude oil for three kinds of fuel: premium, diesel oil and domestic fuel oil. We also test for the presence of asymmetries in the transmission of crude oil to retail prices for two kinds of unleaded premium. The results for all five products robustly point to the existence of an asymmetry in the overall transmission of positive and negative cost shocks to prices, in the sense that crude oil cost increases are added to retail fuel prices faster than decreases are substracted. In the case of diesel oil, the asymmetry turns out to be significant at the production as well as the distribution stages. For domestic fuel oil, however, only firststage (production) asymmetries are significant, whereas for premium only secondstage (distribution) asymmetries may be robustly pointed out. Finally, measured asymmetry lengths range from one month to one quarter.prices, oil, asymmetry, error correction models, bootstrap