The asymmetric impact of economic policy uncertainty on global retail energy markets: Are the markets responding to the fear of the unknown?

Following the paucity of empirical studies on the effects of economic policy uncertainty (EPU) on global retail energy markets and the need to reassess the markets for the prevalence of rockets and feathers effect and rent-seeking behavior by retailers during the Covid-19 pandemic, we studied the asymmetric response of the markets to changes in EPU and crude oil costs. We estimated nonlinear autoregressive distributed lag models over the period 2004 M11-2020 M6 using data for global and domestic EPUs as well as gasoline, automotive diesel, domestic heating oil, industrial fuel oil and crude oil markets. We find that rising uncertainty significantly increases retail energy prices both in the short-run and long-run, especially in UK, Japan and Europe. The asymmetric patterns show that many of the markets respond more to rising uncertainty than declining uncertainty, suggesting the prevalence of the “fear of the unknown”. Our results also showed significant evidence of rockets and feathers effect in all the countries, except Canada. Furthermore, the likelihood of rent-seeking by retailers was observed in the diesel and domestic heating oil markets in Italy, UK, and France. The study concluded that these findings have important policy implications, particularly as they relate to consumer welfare, antitrust policies and stability of the policy environment.