Cotton, Polyester and Oil Prices

This article analyzes the relationship between the prices of the two major textile fibers -cotton and polyester- and the price of crude oil over the period 1991-2008. Cointegration tests are inconclusive and two alternative analyses are conducted: the strict approach assumes that prices are not cointegrated, and the flexible approach assumes that prices are cointegrated. As expected, both approaches find that oil prices do not depend on polyester or cotton prices. The overarching regularities observed in this study can be summarized as follows: (1) the effect of oil prices on cotton and polyester prices is, at most, relatively small; (2) the effect of cotton prices on polyester prices is, at most, relatively small. However, while a permanent shock to polyester prices results in permanently higher cotton prices in the flexible approach, it does not affect cotton prices in the strict approach.