Asymmetric Impact of Crude Oil Cost on Diesel Price in Canada: Evidence from Nonlinear ARDL Model

Abstract

This paper examined the retail diesel market in Canada for evidence of asymmetric price adjustment and rent-seeking arising from the fluctuations in crude oil prices over the period January 2005 to December 2015. The study used the recently introduced nonlinear ARDL model. The findings indicate sluggish speed of adjustment of 22% for both ex-tax prices and pump prices, which is typical of markets witnessing weak competition and prolonged periods of mispricing. However, the results further indicate that Canadian consumers of retail automotive diesel are sufficiently insulated from the fluctuations of the international crude oil market since the estimated long-run coefficients ranged between 0.60 and 0.69. At the 5% level, the results did not show significant evidence of long run asymmetry in the retail diesel market. In addition, the results did not indicate significant short run additive asymmetry at the 5% level or the prevalence of the rockets and feathers effect. The absence of the rockets and feathers effect also means that the market is free from the problem of rent-seeking by retailers. This is desirable and indicates that regulatory policies should continuously monitor the market in order to preserve competition and the overall social welfare.

Keywords: Asymmetric Price Adjustment, Rockets and Feathers Effect, Nonlinear ARDL Model, Canada.

JEL Codes: Q43; D40; C22; N12

DOI: 10.7176/JESD/10-4-14