Widening crack between crude oil price and retail price of gasoline

Content Provider	Semantic Scholar
Copyright Year	2016
Abstract	Despite a substantial fall in the crude oil price in recent months, the price of regular gasoline has not shown much decline. People feel that gasoline price rises at the speed of rocket and falls at the speed of a feather, thus asymmetry in the speed of price rise and the price fall. This asymmetry was felt in early in early 1990's and tested by several economists using US data relating to crude oil price, gasoline price and marketing margin. A paper by Borenstein et al. (1992) for National Bureau of Economic Research found that the gasoline price at the pump increases in four weeks after the crude price increase, while it takes 8 weeks for decrease in price after a fall in crude price. The Borenstein paper uses "asymmetric partial adjustment model". According to this paper the most significant asymmetry appears in the response of retail price to wholesale price changes. The paper also found that there was no asymmetry in response of wholesale gasoline price to crude price. In a paper presented at Canadian Economic Association conference in Ottawa (2011) Janelle Mann using "threshold autoregressive" (TAR) model found that the North American crude, and gasoline, wholesale and retail, prices are cointegrated and move to equilibrium once they have reached a threshold of marketing margins. Both these studies, and those in between them, reason that the asymmetry in response is caused by marketing margins. Michael J. Ervin (2011) of the Kent Group Limited (M.J. Ervin & Associates) points out that there has been widening gap (crack) between crude price of West Texas Intermediate (WTI) and the wholesale price of gasoline. This observation is different than all previous studies. In Nova Scotia the gasoline price is regulated and the regulator decides on the transportation cost, maximum and minimum wholesale and retail margins. The regulated gasoline prices are prescribed using a fixed formula. Since the formula is fixed, the base wholesale price (rack price) and retail price are perfectly co-integrated. The current increase in crack between crude oil price and retail price may be explained by increasing gap between crude oil price and rack price. The present paper examines the relationship between WTI crude, Brent crude, rack (base wholesale) and retail prices by taking Nova Scotia data from 2001 to 2014. The period covers both the regulated and unregulated gasoline markets in Nova Scotia. The only refinery in Nova Scotia terminated its operations in 2013. Fuel terminals now provide the needed gasoline. However, this change has not affected the gasoline price calculation by the Regulator. The paper finds that the demand for crude oil has decreased and the supply of crude oil has increased lowering its price. On the other hand, the demand for gasoline is more stable while the supply of gasoline has reduced for various reasons. As a result, the rack prices have stayed high and the refiner margins have increased causing widening of the crack between crude price and rack price of gasoline.
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Alternate Webpage(s)	https://economics.acadiau.ca/tl_files/sites/economics/resources/ACEA/Papers%20and%20Procedings/2015/P.%20Arya%20-%202015%20-Widening%20crack.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article