Protocol to Assess the Impact of Crude Oil Price Fluctuations on Future Asphalt Prices

Abstract

It is clear for the transportation industry that asphalt prices are heavily affected by changes in the crude oil market. This occurs because asphalt is a byproduct of the process of refining crude oil. However, there is still a lack of research on assessing the economic implications of this relationship. This paper assesses those implications through an innovative statistical process designed to quantify the economic correlation between asphalt and crude oil price fluctuations in Alabama. The proposed statistical process is used in this paper to model the relationship between the Alabama Department of Transportation’s (ALDOT’s) monthly asphalt price index and a national crude oil index published by the US Energy Information Administration. The process quantifies the relationship between these two commodities in relation to two metrics: (1) the time gap between an observed change in the crude oil index and its corresponding impact on the asphalt price index and (2) the magnitude of that impact. It was found that the most likely time gap between crude oil and asphalt price fluctuations in Alabama is 3 months, with a change ratio of 0.58. This means that a 1% increase in the price of crude oil would most likely affect the Alabama asphalt market 3 months later with a price increase of about 0.58%. Recognizing that these are just average values, the paper also presents a risk assessment tool that provides ALDOT with the probability of occurrence of different scenarios taking into consideration the observed variability in time gaps and change ratios.