Crude Oil and Gasoline Prices: An Asymmetric Relationship? - Economic Review, First Quarter, 1998 - Dallas Fed

Gasoline accounts for about half the U.S. consumption of petroleum products, and its price is the most visible among these products. As such, changes in gasoline prices are always under public scrutiny. Many claim to observe an asymmetric relationship between gasoline and oil prices—specifically that gasoline prices respond more quickly when oil prices are rising than when oil prices are falling (Figure 1 ). President George Bush gave these concerns official weight during the Gulf War when he asked the oil companies to show restraint in raising prices for their products. Much of the previous research provides econometric support for public claims of asymmetry in the movements of gasoline and crude oil prices. Bacon (1991) found asymmetry in the U.K. gasoline market, and Karrenbrock (1991), French (1991), Borenstein, Cameron, and Gilbert (1997), and a GAO report (1993) all found some evidence of an asymmetric response in U.S. gasoline markets. Norman and Shin (1991) found a symmetric response in U.S. gasoline markets. Of these studies, one of the most comprehensive and compelling is that of Borenstein, Cameron, and Gilbert (1997), hereafter identified as BCG. They use a series of bivariate errorcorrection models to test for asymmetry in price movements in each of the various stages in the production and distribution of gasoline from the crude oil price through the refinery to the retail pump, using weekly and biweekly data from 1986 to 1992. They find strong and pervasive evidence of asymmetry. As Shin (1992) has argued, however, the periodicity of the data, the sample period of estimation, and the model specification may have affected the results obtained in previous studies. To explore these issues, we extend the work of BCG by using several different model Crude Oil and Gasoline Prices: An Asymmetric Relationship?