Monday, May 9, 2011

Comparison of gasoline prices to oil prices

Prices at the pump go up mercilessly when oil rises, but when oil drops, where is the relief?

The question is often asked: Why is it that gasoline prices always go up immediately when the price of a barrel of oil goes up, but never come down right away when oil drops? Of course, it’s a rhetorical question in the sense that the questioner has already concluded that service stations and oil companies are on the take” and are quick to raise prices but snail-like in the other direction.

So what’s the real answer?
To get to the bottom of this, I’ve aligned the prices for a barrel of oil sold into the United States with the average price in the United States of a gallon of regular gasoline over the period from January 1997 through April 2011. By picking a point in time (January 1997) and setting an index between the price of a barrel of oil and the price of a gallon of gasoline to be equal to 1, we can track the percentages of increase or decrease of the prices of each to see if one leads the other (which you might assume), whether they move together, or if they appear to have not so tight a correlation. I chose the beginning date simply because that is when the Department of Energy data started publishing these prices on a weekly basis. I have colored-coded the index columns in the spreadsheet to show week-on-week increases in green and decreases in yellow, making it easier to spot correlations.

Click here to see a chart of oil versus gasoline pricing from 1997 to April 2011.

Click here to see the data (Excel spreadsheet).

What do the data show?
For one thing, a barrel of oil in April 2011 is 5.5 times more expensive than it was in January 1997. On the other hand, the price of a gallon of gasoline is only 3.2 times more expensive over the same period. I have applied no inflation factor because I am comparing the price of a barrel of oil to the price of a gallon of gasoline, both priced in U.S. dollars. During this period, the price of a barrel of oil rose 410 times (week-on-week), whereas a gallon of gasoline increased only 362 times. Correspondingly, the price of a barrel of oil went down 336 times (week-on-week), whereas gasoline went down 376 times.

The increase/decrease statistics as well as the overall price multiples seem to counter the thought that gasoline prices go up quickly and ratchet down slowly. Apparently, people’s memories of gasoline prices going up are sharper than their memories of prices going down.

Conclusion
Not being an economist, I wouldn’t even venture to draw a conclusion based on these data, but it’s the first time I’ve seen them compared this way, so perhaps a more astute analyst than I can derive some relevant conclusions.

Copyright 2011 Randy Hunt

16 comments:

  1. Discoveries of large oil and gas reserves in the US and elsewhere have been reported this year and last. We now know for sure that there is more gas and oil below ground today than was thought to exist 5, 10 and even 15 years ago. And yet prices continue to go up. Oil and gas prices involve much more that simple supply and demand. The commodity markets and price manipulation by energy companies, investors and others explains much of our pain at the pump; another explanation is international politics. Your charts and analysis is far too simplistic. The answer is complex.

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  2. @Bill Buckley: My charts and analysis was provided to dispell the notion that prices at the pump go up like a rocket and come down like a feather.

    Nowhere in this piece did I attempt to explain how oil and gas prices are established. I worked as a financial auditor in the oil and gas industry for five years in Midland, Texas. Believe me, I know that the economics of fossil fuels is complex.

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  3. Why care? Isn't it more of an interesting issue to know that prices (whatever they are) are almost completely disconnected from usual and customary supply and demand influences? And, in fact, are subject to manipulation in many forms? The pump price has almost nothing (or little) to do with actual supply, production or delivery costs. So why should anyone care how fast or slowly an almost entirely arbitrary price capriciously moves?

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  4. Randy, what would be interesting is compare the price of a gallon of crude oil to a gallon of gas. In 1998, I was teaching sixth graders about economics and we tracked the price of North Slope crude oil. That year a barrel of oil slipped below $10. A standard barrel of oil is 42 gallons. At that time a gallon of crude was about 25 cents. Today's price of oil hovers around $100 per barrel or about $2.25 a gallon. That is 1000% inflation! We are only experiencing about 300% inflation in gas prices at the pump. However, gas prices in other parts of the world out 2-3 times what we pay. What I want to know is how did they make a profit 14 years ago at $10-20 a barrel? Somebody is making a lot of money at current prices.

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  5. Randy, this is all interesting but it is somewhat apples to oranges (both fruit I know). The price of oil is set on a global market platform and is driven by demand and supply on a global basis. So, for example, West Texas Crude is priced to a global index and driven as much by demand in Asia as demand in the US (or more). Gasoline, on the other hand, is sold at a domestically determined price driven by supply, refinery capacity, business cycles. So while the oil industry would say that domestically supply and demand are essentially at equilibrium that can change. Our best approach is to keep lowering consumption through investment in higher efficiencies, better transport planning and shifting to alternatives like electric and CNG.

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    Replies
    1. I was not attempting to comment on the methods for pricing; only to provide data that disprove the notion that gasoline price hikes are like a one way ratchet. My daughter ran a correlation analysis on the data which resulted in more than 95% correlation. So you may believe that these data are apples versus oranges but a 95%+ correlation would imply something more like Macintoshes versus Red Delicious.

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  6. What ever happened to the audit that was supposed to be done last summer I believe?

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  7. I would have preferred that you use the lowest prices in the data set rather than using the prices from the oldest date. Doing so would have provided a better reference as to the true nature of the pricing extremes. I made those changes in your calculations & was surprised to find that the multiple between highest & lowest oil prices was a more than a 15 times increase, while the same comparison for gas pricing was about 4.3 times more. That means to me that there are obviously other factors at work in the gas-oil pricing game. Since gas is made from oil it's hard to understand that oil prices can inflate 15 times while gas prices only inflate 4.3 times.

    One other startling reality is the collapse of oil & gas prices from 7-11-08 to 12-26-08. In 5.4 months, the price of oil & gas dropped ~74% & 166%, respectively?? How in the world does that happen without some kind of serious price manipulation?? Lord knows supply & demand didn't change that much in 6 months. They can't pump that much oil that fast & people don't just cut back that much on their demand for oil & gas--regardless of the economic collapse that occur when GWB & his kind were mismanaging the USA.

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  8. Another interesting calculation to compare is the ratio of gas price per gallon vs oil price per gallon (i.e. oil price per gallon / (price per barrel / 42). That shows a very interesting trend. I'd like to see some discussion about why this ratio decreases as oil prices increase faster than gas prices over time.

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  9. I see somebody had to play the "It's Bush's Fault Card". Gimme a break. When are you people going to make Pharoah Obama accountable for his failed policies? And it was a Democratic Congress with Barney Frank and his Fannie Mae buddies that contributed greatly to the economic collapse!

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    1. Dr. Phineas FerbJune 26, 2012 at 4:55 PM

      I am not sure when the people will make him accountable, but my guess is that they will do it on 11/5 and he will drown his opponent. He is doing circles around Romney. He just beat him on the immigration bit. It is not his fault that someone puts his gas at a higher price.

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  10. Randy,
    The chart was exactly what I was looking for and roughly speaking, when oil is around $80 per barrel we should be under $3 / gal at the pump. I have read alot of your comments about supply and demand but the fact that it feels like we are getting screwed at the pump. Was in SC recently with gas at $3.05 & in OH at $3.65 - the same day. State taxes play a part but REALLY - $60 difference. Athe current $80 per barrel we should be around $2.50 so when are we going to see that again?

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  11. I heard a report that gasoline prices will be at levels below $3.00 by the end of October.

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  12. Oil companies (like other companies) have lobbyist - as long as that happens does anyone really think anything is going to change. You can blame dems, repubs, libs. As long as we the people keep fighting like it's a football game of whose team is the winner nothing will change.

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  13. Does anyone have an up to date report to show current gasoline prices vs, oil price per bbl.up to july /8/2012 ? This type of data should be sent to both of our do-nothing political parties.
    We are the suckers getting ripped off and they know, at best, we will just complain to each other when we should be attacking our political leaders who are controlled by the powerful lobbies.

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  14. Anonymous 7/8/12 12:39,

    I like your attack on political leaders and lobbyists.

    Unfortunately, as far as oil prices, we are our own enemies. More powerful than any pol or lobbyist is the law of supply and demand. There is a lot of things that we can do to effect supply and demand - and these things petrify the oil companies and lobbyists. And most of these things will benefit us immediately.

    Example 1: If someone has an oldish oil burner and natural gas on their street, they can cut their home energy bills by 1/2. The payback is relatively short - AND, as an individual, you effect supply and demand. (I have a small spreadsheet showing the savings and if anyone wants it just drop me an email (stevebarr@excite.com) and I'll send it along.)

    Example 2: We can add insulation, change a bulb or two to an LED (If everyone in this country replaced one incandescent to and LED bulb, the equivalent of 10 nuclear power plants would not be needed.). There are lots of things that can be done to lower our dependance on oil.

    Every time we use a BTU less of oil, that's a BTU that stays in the "supply" column and isn't in the "demand" column. Being able to change that ratio, is our real power. They can have as many pols on the take or lobbyists as they want. Eventually, if everyone did just a little bit, they will drown in their oil. And, as we do things, we save $$$$ and benefit ourselves.

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