Cointegration and US Regional gasoline prices: Testing market efficiency from the stationarity of price proportions

Abstract

It is well known that oil price shocks are a major concern to the health of the global economy. Unstable oil prices have a significant negative impact on consumer confidence and business decision making. As a result economic recovery may be longer and more complicated. Controlling the global oil price may not be possible, but a main concern of this research relates to energy market efficiency and as to whether relative price differences respond in an appropriate way across the region of one country. Here, the different geographic areas of a country are analysed to see whether they belong to the same market and result in the relative prices being stationary. The gasoline market in different regions of the US is analyzed. It is believed that if the gasoline market is sufficiently active in the US, then as a result of arbitrage, long-run gasoline prices by region should follow each other. In an efficient market, a price shock in one region would be reflected in all other prices. This proposition is tested in an effective manner by a barrage of stationarity tests. This is pertinent as such tests have been applied in antitrust cases in Italy and the Netherlands to determine whether there might be market imperfections or in association with more heuristic information, possible collusion.