The Asymmetric Effects of Crude Oil Prices and Exchange Rates on Diesel Prices for 27 European Countries

Abstract

Many studies have examined the asymmetric effect of US dollar-denominated crude oil prices on petroleum product prices. The ‘rockets and feathers’ argument suggests that a crude price increase raises petroleum product prices more than a corresponding decrease in crude prices lowers product prices. However, for the countries that do not use the US dollar as a medium of exchange, petroleum product prices are also affected by the exchange rates. This paper analysed the asymmetric effects of both US dollar-denominated crude oil prices and exchange rates on local currency-denominated diesel prices for 27 European countries in the short run as well as long run. The overall empirical evidence suggests that, in the short run, diesel prices react more to crude oil price increases than to a decrease, parallel to the ‘rockets and feathers’ argument. However, contrary to that argument, the long-run adjustment is the opposite. As for exchange rate shocks, again the ‘rockets and feathers’ argument holds and diesel prices respond more to exchange rate depreciation than appreciation in the short and long run.