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The behaviour of consumer gas prices in an environment of high and volatile oil prices

Cornille, David and Meyler, Aidan (2010): The behaviour of consumer gas prices in an environment of high and volatile oil prices.

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In this paper we examine the relationship between oil prices and consumer gas prices in the euro area. The main features of the paper are: (1) the combination of low frequency (semi-annual) consumer gas price data on price levels from Eurostat with higher frequency (monthly) index HICP data; (2) the consideration of the different stages in the supply chain - from oil prices, to wholesale (border and spot market prices) to consumer prices; (3) analysis at the aggregated euro area and individual country level; and (4) a sample period covering from 1995 to 2010, covering a period with relatively low and stable oil prices, but also one with higher and more volatile oil prices. The questions we address are: (a) what is the behaviour of gas prices and in particular the pass through of upstream oil and gas prices into consumer prices (i.e. how much is passed through and how quickly) and (b) are there differences across countries.

Our main findings are that: First, on average, gas import prices are passed through fully in to consumer gas prices, albeit with some lag. An implication of this is that the elasticity of consumer prices with respect to upstream prices is an increasing function of their level. Second, accounting for the regular calendar for price ‘resetting’ significantly improves the fit of the estimations. However, this cannot be done via regular seasonal dummies but they must be interacted with the error correction term as the reset adjustment may be up or down. Third, in general the fit of the estimations is higher using oil prices as the explanatory variable rather than gas import prices. This may be because gas price setters take into account the signal from current oil price levels when resetting their prices, whereas gas import prices are generally backward looking as in Europe they are mostly index-linked to oil price developments in the preceding months. Fourth, regarding cross-country patterns, there is some evidence of differences which may be linked to differences in the degree of market liberalisation. Lastly, whilst there are signs of some changes in historical long-term relationship between oil prices and gas import prices, these are too recent to be identified robustly using the relatively low frequency, aggregate data we utilise in this paper.

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