Rising household diesel consumption in the United States: A cause for concern? Evidence on asymmetric pricing

Fosten, Jack (2012) Rising household diesel consumption in the United States: A cause for concern? Evidence on asymmetric pricing. Energy Economics, 34 (5). pp. 1514-1522. ISSN 0140-9883

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Abstract

Papers in the literature have thus far overlooked the projected increase in U.S. diesel car share when looking at asymmetries in petroleum pricing. This paper addresses this issue by comparing retail gasoline and diesel prices in order to see whether they rise faster than they fall given the price of their upstream input, crude oil. This phenomenon has been termed in the literature as "Rockets and Feathers." We apply the threshold vector error correction model (TVECM) of Hansen and Seo (2002) which has not yet been applied in the literature. We account for the 2008 structural break to crude oil and petroleum prices by splitting the sample using evidence from the recent structural break unit root test of Kim and Perron (2009). Both markets seem to price symmetrically before the 2008 break, but we find evidence of asymmetric pricing after 2008 in diesel prices, and not in gasoline prices. Given that the diesel market is small relative to the gasoline market and therefore more open to price exploitation, the ongoing cost increases associated with the policy of switching to Ultra Low Sulphur diesel (ULSD) from 2006 to 2010 could be at the heart of this asymmetry. With this in mind, the U.S. Federal Trade Commission should monitor diesel prices as the market share grows, in order to ensure that consumers are not adversely affected. (C) 2012 Elsevier B.V. All rights reserved.

Item Type: Article
Uncontrolled Keywords: gasoline pricing,diesel pricing,asymmetric adjustment,threshold cointegration,cointegration,structural beaks
Faculty \ School: Faculty of Social Sciences > School of Economics
Depositing User: Pure Connector
Date Deposited: 18 Aug 2015 14:38
Last Modified: 22 Apr 2020 00:24
URI: https://ueaeprints.uea.ac.uk/id/eprint/54131
DOI: 10.1016/j.eneco.2012.06.025

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