Fuel price transmission mechanisms in Portugal

TLDR: In this paper, the authors analyse the behavior of fuel prices at the pump (unleaded gasoline and diesel) in Portugal, relative to positive and negative variations in Brent crude oil price.

Abstract: This study aims to analyse the behaviour of fuel prices at the pump (unleaded gasoline and diesel) in Portugal, relative to positive and negative variations in Brent crude oil price. Applying an Autoregressive Distributed Lags (ARDL) model to weekly time series data for the period of January 2004 through May 2009, we detected some signs of asymmetry in the transmission price mechanism. However, these patterns are not statistically significant enough to reject hypotheses of symmetry in the price adjustment mechanisms of fuel in Portugal.

Figures

Figure 2. Effect on diesel price of variations in the oil price.

Figure 4. Accumulated adjustment effect on the diesel price.

Table 1. Results of the stationarity tests.

Table 2. Results of stationarity tests for the first differences.

Figure 1. Effect on gasoline price of variations in the oil price.

Table 3. Results of cointegration tests.

Full text

WORKING PAPER SERIES
Universidade dos Açores
Universidade da Madeira
CEEAplA WP No. 18/2011
Fuel Price Transmission Mechanisms in
Portugal
Francisco Silva
Maria Graça Batista
Nelson Elias
July 2011

Fuel Price Transmission Mechanisms in Portugal
Francisco Silva
Universidade dos Açores (DEG e CEEAplA)
Maria Graça Batista
Universidade dos Açores (DEG e CEEAplA)
Nelson Elias
Universidade dos Açores (DEG)
Working Paper n.º 18/2011
Julho de 2011

CEEAplA Working Paper n.º 18/2011
Julho de 2011
RESUMO/ABSTRACT
Fuel Price Transmission Mechanisms in Portugal
This study aims to analyze the behavior of fuel prices at the pump (unleaded
gasoline and diesel) in Portugal, relative to positive and negative variations in
Brent Crude Oil prices. Applying an autoregressive distributed lags model
(ARDL) to weekly time series data for the period of January 2004 through May
2009, we detected some signs of asymmetry in the transmission price
mechanism. However, these patterns are not statistically significant enough to
reject hypotheses of symmetry in the price adjustment mechanisms of fuels in
Portugal.
Keywords: fuel and oil prices, price adjustment mechanisms.
Francisco Silva
Universidade dos Açores
Departamento de Economia e Gestão
Rua da Mãe de Deus, 58
9501-801 Ponta Delgada
Maria Graça Batista
Universidade dos Açores
Departamento de Economia e Gestão
Rua da Mãe de Deus, 58
9501-801 Ponta Delgada
Nelson Elias
Universidade dos Açores
Departamento de Economia e Gestão
Rua da Mãe de Deus, 58
9501-801 Ponta Delgada

1
FUEL PRICE TRANSMISSION MECHANISMS IN PORTUGAL
FRANCISCO SILVA
Departamento de Economia e Gestão
Universidade dos Açores
CEEAplA
Apartado 1422
9501-801 Ponta Delgada, Azores; Portugal
Tel.: 296 650 084
Fax: 296 650 083
fsilva@uac.pt
MARIA DA GRAÇA BATISTA
Departamento de Economia e Gestão
Universidade dos Açores
CEEAplA
Apartado 1422
9501-801 Ponta Delgada, Azores; Portugal
Tel.: 296 650 084
Fax: 296 650 083
mbatista@uac.pt
NELSON ELIAS
Departamento de Economia e Gestão
Universidade dos Açores
Apartado 1422
9501-801 Ponta Delgada, Azores; Portugal
Tel.: 296 650 084
Fax: 296 650 083
nelsonelias2010@hotmail.com

2
FUEL PRICE TRANSMISSION MECHANISMS IN
PORTUGAL
ABSTRACT
This study aims to analyze the behavior of fuel prices at the pump (unleaded gasoline
and diesel) in Portugal, relative to positive and negative variations in Brent Crude Oil
prices. Applying an autoregressive distributed lags model (ARDL) to weekly time series
data for the period of January 2004 through May 2009, we detected some signs of
asymmetry in the transmission price mechanism. However, these patterns are not
statistically significant enough to reject hypotheses of symmetry in the price adjustment
mechanisms of fuels in Portugal.
Keywords: fuel and oil prices, price adjustment mechanisms.

Frequently asked questions

Q1. What are the contributions in "Fuel price transmission mechanisms in portugal" ?

This study aims to analyze the behavior of fuel prices at the pump ( unleaded gasoline and diesel ) in Portugal, relative to positive and negative variations in Brent Crude Oil prices. 

Q2. What is the recent study on the transmission of prices?

The results of most of the previous studies point to asymmetric patterns in the transmission of prices, with a rise in the producer price being transmitted more rapidly to the final price, then when there is a decline. 

Q3. How many liters of gasoline was needed to convert the values?

It was necessary to convert the values to Euros/ liter, dividing the series into the base value of 158.76 liters, the equivalent of one barrel, according to the dollar/Euro exchange rate for the average of the respective week. 

Q4. How much of the consumption of road fuel is based on the data?

According to 2008 data, gasoline and diesel represent roughly 48% (11% gasoline and 37% diesel) of the total consumption of road fuel, according to the Portuguese competition authority (AdC, 3rd and 4th quarters of 2008). 

Q5. What is the main reason why the prices of gasoline and diesel are asymmetric?

Kaufmann and Laskowski (2005) concluded from an econometric analysis of monthly USA data that the asymmetric relationship between oil and gasoline prices stems from the refining costs and the company’s inventory process. 

Q6. What is the main reason why prices rise?

On the other hand, an occasional excess in demand makes the prices rise rapidly, due to unlimited stocks and production delays (production is unable to adjust itself immediately). 

Q7. How many weeks is the adequate number of lag periods to use in the other two models?

The Ordered Probit model is used to determine that eight weeks constitutes the most adequate number of lag periods to use in the other two models. 

Q8. What is the effect of exchange rates on the final price of gasoline?

The effects of the exchange rates are statistically significant and conclude that gasoline prices respond more rapidly to rises than falls of dollar/Euro exchanges. 

Q9. how many periods can be used to calculate the effect accumulated in the final prices?

The effect accumulated in the final prices is calculated for the cases of positive or negative variations in the oil price as follows:Positive Accumulated Effect β … β = ∑ β (4)Negative Accumulated Effect β … β = ∑ β (5)The aforementioned methodology makes it possible to formulate and test the hypotheses related to the adjustment behavior of the fuel prices. 

Q10. What are the main reasons for choosing the price transmission mechanism of fuel?

The lack of research on the subject in Portugal and the frequent doubts and complaints presented by consumers and other agents were the main reasons for choosing the price transmission mechanism of fuel as the topic.