Tuesday, November 13, 2018

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.


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.

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