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This paper investigates the roles of structural changes and exchange rates in the
relationship between retail energy prices and crude oil costs. Using a dummy
variable approach, this paper argues that once the structural change in this
relationship is taken into consideration, the empirical results of studies that found
evidence in support of asymmetric behavior, which is largely obscured at pump
where prices include both tax and duty, no longer hold. Adopting a nonlinear Auto
Regressive Distributive Lag (ARDL) framework, this paper also shows that studies
that failed to account for the exchange rate as part of the marginal cost of
importing oil for countries with a high oil import dependency ratio may be
misleading. Specifically, the results indicate that once the exchange rate effect is
taken into consideration, the possibility of rent-seeking behavior in the gasoline
markets of Italy and Spain disappears, while the rockets and feathers effect in the
ex-tax gasoline, diesel, domestic heating oil, and industrial fuel oil markets of
France, Germany, Italy, and Spain vanishes. Finally, employing instrumental varia-
bles and generalized method of moment estimators, this paper further finds that the
results are robust and free from endogeneity issues.
