Stephen P. A. Brown and Mine K. Yücel
he available evidence
suggests that asymmetry is unlikely to be the result of monopoly power exercised by large, integrated oil companies.
The United States consumes 8.5 million barrels of gasoline daily— nearly half its daily consumption of all petroleum products. The average automobile tank is filled weekly, and gasoline prices are posted at every street corner where there is a gasoline station. Consequently, most U.S. consumers are very aware of movements in gasoline prices and closely observe the asymmetry when crude oil and gasoline prices fluctuate. Many consumers complain that gasoline prices rise more quickly when crude oil prices are rising than they fall when crude oil prices are falling, exhibiting an asymmetric relationship.1 To the naked eye, movements in spot crude oil and retail gasoline prices may lend some credence to consumers’ complaints (Figure 1 ). Furthermore, in some instances when gasoline prices have risen sharply and swiftly following a rise in crude oil prices —such as occurred in 1999 and 2000 and during the Gulf War in 1990—consumers and politicians have called for policies to put a stop to what is seen as unfair pricing practices for petroleum products.2 Such reactions seem to stem from a popular suspicion that large, integrated companies have monopolized the oil industry. The public seems to take the asymmetric relationship between gasoline and crude oil prices as evidence that the petroleum industry is monopolistic. Most of the previous research on the subject confirms at least part of what consumers suspect: it provides econometric evidence of an asymmetric relationship between gasoline and crude oil prices. This article extends inquiry into the issue by considering competing explanations for the asymmetry. The available evidence
Detrended Crude Oil and Retail Gasoline Prices
Cents per gallon
50 40 30 20 10 0 Crude oil, spot price, WTI
Dollars per barrel
25 20 15 10 5 0 –5 Unleaded regular, self-serve gasoline price –10 –15
Stephen P. A. Brown is director of energy economics and microeconomic policy analysis in the Research Department at the Federal Reserve Bank of Dallas. Mine K. Yücel is a senior economist and research officer in the Research Department at the Federal Reserve Bank of Dallas.
–10 –20 –30 ’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99
SOURCES: Department of Energy; Haver Analytics.
ECONOMIC AND FINANCIAL REVIEW THIRD QUARTER 2000
suggests that asymmetry is unlikely to be the result of monopoly power exercised by large, integrated oil companies. An examination of the possible explanations for the asymmetry also suggests that government intervention to prevent the asymmetry between gasoline and crude oil prices is likely to reduce economic efficiency. THE EVIDENCE FOR ASYMMETRY Most of the previous research provides econometric support for public claims that gasoline prices rise more quickly when crude oil prices are rising than they fall when crude prices are falling. Bacon (1991) finds asymmetry for the UK gasoline market. Karrenbock (1991); French (1991); Borenstein, Cameron, and Gilbert (1997); Balke, Brown, and Yücel (1998); and a GAO report (1993) all find some evidence for an asymmetric response in U.S. gasoline markets.3 In contrast with the other studies, Norman and Shin (1991) find a symmetric response in U.S. gasoline markets. Of these studies, one of the most visible and comprehensive is that of Borenstein, Cameron, and Gilbert (1997), hereafter identified as BCG. They use weekly and biweekly data from 1986 to 1992 in a series of bivariate errorcorrection models to test for asymmetry in price movements between gasoline’s various stages of production and distribution—from crude oil through the refinery to the retail pump. They find strong and pervasive evidence of asymmetry in all segments of the market. Shin (1992) argues, however, that...