Asymmetric Price Transmission and Impulse Responses between Crude Oil, Jet Fuel, and Diesel

Information on price transmission from crude oil to value-added fuels can disclose underlying market structures and behaviors, such as competitiveness and market power, which are relevant for developing energy outlooks and policy. Many studies have investigated price interdependences in petroleum markets, particularly pass-through effects from oil to gasoline. However, research is scarce on impacts of oil markets on jet fuel and diesel. This absence of information is particularly noteworthy as technological change is progressing that could cause oil to be replaced with bio-feedstock to produce biojet and biodiesel. An understanding of pass-through price relationships between current energy inputs and outputs is crucial to developing industrial risk management strategies, and assisting the development of emerging energy industries. Using a nonlinear time series econometric approach, we examine price transmission from crude oil to jet fuel and diesel. Specifically, we investigate asymmetric price adjustments and the dynamic paths of price responses to crude oil price shocks. Key results include: (1) both jet fuel and diesel have long-run equilibrium relationships with oil prices; (2) price adjustments of jet fuel and diesel are asymmetric, in opposite directions, due to distinct differences in industrial characteristics; (3) the responses of the two types of fuel prices to oil shocks show nonlinear dynamic paths, with different amplitudes and decay periods. Our findings contribute to a better understanding of the current fuel industries, and provide insights into emerging biofuel markets, with implications for businesses and policymakers