Analysing the relationship between oil prices and basic petrochemical feedstocks

Abstract

In this paper we analyse the relationship between crude oil prices and prices of basic petrochemical feedstock. In particular, we estimate dynamic effects of Brent oil prices on naphtha, benzene, ethylene, propylene, acrylonitrile (ACN), vinyl chloride polymer (VCM), purified terephthalic acid (PTA), and monoethylene glycol (MEG). We first analyse cointegration properties among these variables using bounds testing approach. Then we estimate error correction models to assess long- and short-run effects of oil price changes on prices of these petrochemical feedstocks. We find that naphtha prices move one to one with oil prices in the long run. Prices of other feedstock react less than unity in the long run. We also find that only prices of benzene and naphtha react more than unity in the short run whereas prices of propylene and ethylene react less than unity to changes in oil prices. This study fills a major gap in the empirical literature. Although the dynamic interactions among oil prices and fuels as well as other macroeconomic and financial variables have been widely investigated in the literature, the relationships between oil and petrochemicals prices have not been thoroughly analysed. Second, the results of this study have clear policy implications. In particular, we find that prices of basic petrochemicals do not move one to one with oil prices. This finding implies that oil price fluctuations are not fully transmitted to prices of industrial products, and hence oil price changes will have only limited effects on economy. Furthermore, this result also implies that oil companies and oil exporting countries may use petrochemical goods as hedging instruments against oil price falls.