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Diesel fuel price pass-through. (Energy Plug).

The Energy Information Administration (EIA) has previously studied the relationships between wholesale and retail markets for gasoline, and found that changes in spot prices can be used to forecast subsequent changes in retail prices. In a new article, "Diesel Fuel Price Pass-through," EIA extends this analysis to diesel fuel.

Significant changes in spot prices tend to show up in retail prices with some time delay, and EIA theorized that this could be explained by a distributed lag: the impact of a spot price change in a given week might be spread over several following weeks at the retail level. The lag was analyzed by looking at week-to-week changes in spot and retail prices in nine specific regions and the United States overall.

Results. The analysis showed that, depending on the region, between 85 and 107 percent of the diesel spot price change is passed through to retail within 2 months, and also that lag effects decrease over time. About 70 percent of the change occurs in the first 2 weeks and 90 percent within 4 weeks. In all regions, an initial 10-cent spot price change will have at least 5 cents passed through to retail within 2 weeks and at least 8 cents after 4 weeks.

Once the appropriate lags were determined, a spreadsheet model was created to forecast retail price changes by week. Data were available to model most of the regional prices as far back as 1995. The result of this model for the U.S. average retail diesel fuel price is shown in the figure below for the period from January 2001 forward.

The effectiveness of this model was then measured in two ways: the percentage of weeks in which the model correctly forecast the direction of the price change, and the mean absolute error of the forecast weekly retail price change from that actually experienced.

The model provides a relatively accurate forecast of retail price changes one week ahead. For nearly 90 percent of the forecast weeks at the national level the model correctly predicts the direction of the retail price change. The mean absolute error of the retail price change forecast is 0.5 cent per gallon, out of an actual mean weekly change of 1.2 cents.

One revealing aspect of this analysis is that there is little difference between actual retail diesel fuel prices and the forecast. There is no evidence of significant influence on aggregate retail prices beyond the spot price level. In other words, despite allegations of competitive irregularities in retail markets, it appears that virtually all of the movement in retail prices is determined by previous movements in spot prices.

Further Work. The EIA price pass-through modeling efforts to date are useful, but there remains a significant amount of work that could be done in this area. Enhancement and recalibration of the existing retail gasoline price model, using some of the refinements derived from the diesel fuel price model, are underway and scheduled for completion later in 2002.

Diesel Fuel Price Pass-through is available on the EIA Web site at Under "By Fuel" select "Petroleum" and then "Diesel." Scroll down to the Analysis section and click on the "Diesel Fuel Price Pass-through" link. Contact or call 202-586-8959 if you have problems. Questions about the report's content should be directed to Michael Burdette, Office of Oil and Gas, at or 202-586-6649. For general information about energy, contact the National Energy Information Center at or 202-586-8800.
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Publication:Monthly Energy Review
Geographic Code:1USA
Date:Sep 1, 2002
Previous Article:Glossary.
Next Article:Section 1. Energy overview.

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