Gasoline Prices

The NY Times is reporting that after an accident at an Alaska oil field, oil prices jumped by $2 a barrel today. According to the US Energy Information Administration (EIA), oil was going at $66.57/barrel at the end of July. As we all know, oil prices have skyrocketed in recent years, as a barrel was $50.59 at the end of July 2005, $35.14 at the end of July 2004, and $26.72 at the end of July 2003.

Over the same time, gasoline prices have, of course, also skyrocketed. Again according to the EIA, the average gasoline price in the US was $3.05 at the end of July, a big increase in the $2.33 a year earlier, $1.95 in July 2004 and $1.56 in 2003.

How related are these things? Here's a graph of crude oil prices and retail gasoline prices at the end of the first week of each month since 2000:
In case you can't read the regression result there, it's saying that since Jan 2000, the average retail price of gasoline has gone up by 1.45 cents for every cent the price of a gallon of crude oil has increased. Since there are 42 gallons in a barrel, todays $2 increase, if sustained, could amount to another 7 cent increase in retail gasoline prices. Now, of course, this is a pretty simple regression, and certainly there are other things that have affected gasoline prices recently other than crude oil prices (for example, the switch from MTBE to ethanol as an oxygenate), but that's a pretty striking graph. Let's assume, for the sake of a post, that we should believe that relationship. (I find it highly unlikely that the real relationship is that different.)

To put that cents/gallon figure in a little context, U.S Total gasoline sales were 60,282,975 gallons PER DAY in 2005. That's 22 billion gallons of gas per year! So a 7 cent increase (assuming no drop in usage, and since usage hasn't dropped since 1999-2000, that's not a crazy assumption) amounts to an increase in gasoline spending of $1.5 billion. And the $1.50/gallon increase over the past few years means Americans are spending another $33 billion on gasoline, or about 0.3% of the $12.5 trillion in GDP in 2005! Remember, that's just on driving around, not actually buying anything.

So that little story in The Times just annoucned that we've shifted another $1.5 billion of our GDP to gasoline consumption. Something to think about, especially when you consider how inelastic gasoline consumption is. I wonder what we are crowding out? Since the savings rate is negative, even though we are supposedly in a relatively good macroeconomic period, I wonder if, to some extent, this is pushings savings aside...