After reading this piece in the Daily Telegraph claiming prices at the pump were not falling as fast as the price of crude, I decided to see what was going on. I went to the Energy Information Administration website, from which I downloaded the weekly retail gas prices and the spot crude oil prices and compared them to each other. They have records for the latter going back to the beginning of 1986, but for the former only to mid-1990 (with a mysterious gap of 6 weeks between at December 3, 1990 and January 21, 1991). I then charted the price of gas (Weekly U.S. Regular Conventional Retail Gasoline) as a percentage of the price of oil (Weekly Cushing, OK WTI Spot Price FOB):
While it is true that the over the last few weeks crude prices have dropped faster than gasoline, gas prices as a percentage of the cost of crude are near the lowest they have been for the dates for which data are available. And when you compare the relative prices:
You can see that historically the prices have been pretty constant, but that crude ran up much more than gasoline, so the price at the pump was actually less than what it would have been had gas moved in lock-step with crude prices.
I’m not sure how to make sense of the data; help me to analyze it. One straightforward reading might be that gasoline has been underpriced for the past four years, and that it should really be around $5 per gallon now. Is that a naive interpretation?
Or maybe the question is: what’s changed to drive these numbers so far apart?
Yes, gas is underpriced now given the underlying cost of crude and the historical cost relationship. And your next question is an excellent one. Part of it I assume is just a lag effect that buffers the price of inputs for gasoline, since (I’m assuming here) refineries are not paying the spot price, but have contract prices to insulate them from price shocks. Am open to suggestions on the rest.
Gasoline prices are not strictly a function of the price of crude. Refining capacity is a critical component. My friend Cluelow (who works for Chevron in PA) warned me about this over 15 years ago: gas prices would begin to go up as U.S. refineries were forced to update or close –and many moved offshore specifically to avoid that. Offshore refining lends itself to disruption –> price instability.
Right now we are facing a temporary spike reflecting the shut-down of refineries in the face of Gustav. While there will be another spike very shortly (Baytown Exxon is shutting in face of Ike, as is Port Arthur and Beaumont), most of the LA refineries are gearing up production. Moreover, as Ike passes, many of the rigs off NOLA will begin to restart –they never fully did so after Gustav b/c of the long-range threat of Ike.I foresee <$3/gallon gas in Houston by Thanksgiving, if not Halloween.
And don’t EVEN get me started on the whole ethanol angle…..
Gas prices will fluctuate less than oil prices, generally, if you use the retail gasoline prices, which include a constant tax per gallon.
Might be better to do spot unleaded prices vs. spot crude. But still, gasoline prices are not only a function of crude prices.
Just an observatioin – Crude Prices in Feb 08 were @ aprox $100.00 a barrel – like they are now. Retail Gas pices were aproximately 3.21 then, now they are currently 3.88
People who have been paying $3-$4 per gallon of gas feel that this analysis is flawed and oil companies are crooks. And they are right.
Please use a pen and paper to analyze this for yourself and you will see the point better.
Let me illustrate this by an example.
Lets say I make shoes from bundles of leather that I buy at $40. I make them into 10 pairs of shoes and sell for $10 per pair. So I turn $40 into $100 ($40 cost of leather [CoL] + $50 Cost of Making 10 pairs [CoM] + $10 profit). Lets say there is a shortage of leather and price of leather shoots to $120 per bundle but the cost of making shoes goes up only 10% (high inflation rate). If I am a decent person I will sell my shoes for $20/pair ($120 CoL + $55 CoM + $25 profit — higher profit as I need additional investment) But if I am a greedy bastard, I will sell my shoes for $28/pair –i.e. make an additional $80 in profit) and then argue that the cost of shoe (and, boohoo, my profit) has gone down as now the shoes are 23.3 % of a bundle of leather ($28/$120) vs. before when they were 25% of the price of a bundle of leather ($10/$40). Now if you think the numbers were made up, take a look at the government site that gives the info about what percentage of the gas price is actually crude oil: http://www.pueblo.gsa.gov/cic_text/cars/primer-gas/primergas.htm
So, case closed. Oil companies executives (in Houston or other places) are crooks.
Denegator