COVID-19 and Daily Oil Price Pass-Through
One sentence summary: Following an increase in the number of U.S. COVID-19 cases, there is evidence for complete pass-through (incomplete pass-through) of crude oil prices into the U.S. gasoline spot (retail) prices.
The corresponding academic paper by Hakan Yilmazkuday has been accepted for publication at Energy Research Letters.
The working paper version is here.
Abstract
This paper investigates the (crude) oil price pass-through into gasoline spot and gasoline retail prices in the U.S. due to the effects of coronavirus disease 2019 (COVID-19). The investigation is achieved by using daily data in a structural vector autoregression framework. The oil price pass-through is measured as the cumulative impulse response of gasoline spot or gasoline retail prices divided by the cumulative impulse response of oil prices, both following a percentage change in total number of the U.S. COVID-19 cases. The results suggest evidence for complete pass-through of oil prices into gasoline spot prices, whereas the corresponding pass-through into gasoline retail prices is about 29 percent in the long run.
Abstract
This paper investigates the (crude) oil price pass-through into gasoline spot and gasoline retail prices in the U.S. due to the effects of coronavirus disease 2019 (COVID-19). The investigation is achieved by using daily data in a structural vector autoregression framework. The oil price pass-through is measured as the cumulative impulse response of gasoline spot or gasoline retail prices divided by the cumulative impulse response of oil prices, both following a percentage change in total number of the U.S. COVID-19 cases. The results suggest evidence for complete pass-through of oil prices into gasoline spot prices, whereas the corresponding pass-through into gasoline retail prices is about 29 percent in the long run.
Non-technical Summary
Total number of coronavirus disease 2019 (COVID-19) cases in the U.S. has been recorded as more than 30 million as of April 2021 according to the Centers for Disease Control and Prevention. This number is reflected as a substantial drop in the economic activity in the U.S. as individuals have voluntarily started experiencing social distancing to fight against COVID-19 and several layers of government in the U.S. have further implemented stay-at-home orders starting from March 2020. This reduction in economic activity has also resulted in higher unemployment rates and thus lower overall expenditure of individuals. Accordingly, the demand for both crude oil and gasoline has been reduced dramatically, whereas supply shocks due to the OPEC disagreement starting from March 2020 have further contributed to the turmoil of crude oil prices around the globe.
Based on this period of strong volatility due to the COVID-19 crisis, this paper investigates the pass-through of crude oil prices into the U.S. gasoline spot and gasoline retail prices. This is achieved by using the implications of a structural vector autoregression (SVAR) model, where weekly percentage changes of daily endogenous variables are used for the crude oil prices, gasoline spot prices, and gasoline retail prices. Weekly percentage changes in daily total number of COVID-19 cases in the U.S. enter as an exogenous variable in this framework. The pass-through of crude oil prices into gasoline prices is measured by the cumulative impulse response of gasoline spot or gasoline retail prices divided by the cumulative response of crude oil prices, both following a percentage change in the U.S. COVID-19 cases.
The empirical results based on the crude oil price data of "Brent Spot Price FOB (Dollars per Barrel)" provide evidence for complete pass-through of crude oil prices into gasoline spot prices. In particular, 1% of a weekly increase in daily crude oil prices results in about 1.1% of a weekly increase in daily gasoline spot prices in the U.S. after one week, 1% after one month, and again 1% after two months.
The results also suggest that the pass-through of oil prices into gasoline retail prices in the U.S. is incomplete, both in the short run and the long run. Specifically, 1% of a weekly increase in daily crude oil prices results in about 0.15% of a weekly increase in daily gasoline retail prices after one week, 0.29% after one month, and again 0.29% after two months. The empirical results are highly similar when the crude oil price data of "Cushing, OK WTI Spot Price FOB (Dollars per Barrel)" are used.
Total number of coronavirus disease 2019 (COVID-19) cases in the U.S. has been recorded as more than 30 million as of April 2021 according to the Centers for Disease Control and Prevention. This number is reflected as a substantial drop in the economic activity in the U.S. as individuals have voluntarily started experiencing social distancing to fight against COVID-19 and several layers of government in the U.S. have further implemented stay-at-home orders starting from March 2020. This reduction in economic activity has also resulted in higher unemployment rates and thus lower overall expenditure of individuals. Accordingly, the demand for both crude oil and gasoline has been reduced dramatically, whereas supply shocks due to the OPEC disagreement starting from March 2020 have further contributed to the turmoil of crude oil prices around the globe.
Based on this period of strong volatility due to the COVID-19 crisis, this paper investigates the pass-through of crude oil prices into the U.S. gasoline spot and gasoline retail prices. This is achieved by using the implications of a structural vector autoregression (SVAR) model, where weekly percentage changes of daily endogenous variables are used for the crude oil prices, gasoline spot prices, and gasoline retail prices. Weekly percentage changes in daily total number of COVID-19 cases in the U.S. enter as an exogenous variable in this framework. The pass-through of crude oil prices into gasoline prices is measured by the cumulative impulse response of gasoline spot or gasoline retail prices divided by the cumulative response of crude oil prices, both following a percentage change in the U.S. COVID-19 cases.
The results also suggest that the pass-through of oil prices into gasoline retail prices in the U.S. is incomplete, both in the short run and the long run. Specifically, 1% of a weekly increase in daily crude oil prices results in about 0.15% of a weekly increase in daily gasoline retail prices after one week, 0.29% after one month, and again 0.29% after two months. The empirical results are highly similar when the crude oil price data of "Cushing, OK WTI Spot Price FOB (Dollars per Barrel)" are used.
The corresponding academic paper by Hakan Yilmazkuday has been accepted for publication at Energy Research Letters.
The working paper version is here.