Motorists are interested in knowing what is causing the escalating at-pump petroleum prices and how does gasoline or diesel price respond to changes in international crude oil prices and currency exchange rates. This study investigates both the long-run and short-run relationships between these factors. An Error Correction Model is developed and used to test the actual 210 weekly retail petrol and diesel prices over a four-year period from 2004 to 2008. The results suggest that the world crude oil prices do have an impact on the local retail prices both in the long run and the short term, while in contrast, the currency exchange rate effect is not found in the long term. An asymmetric effect is also observed in retail petrol prices, but not in retail diesel prices. In this study, different tax treatment between the two is found to be the main reason for the differential adjustment speeds of petrol and diesel.
