by Michael Sivak.
Gasoline is one of the products refined from crude oil. Thus, the price of crude oil should have a strong influence on the price of gasoline. However, the retail price of gasoline includes other costs as well. The Energy Information Administration (EIA) estimates that in the United States from 2008 to 2017, crude oil represented only 61% of the retail price of gasoline. Refining costs and profits represented 12%, distribution and marketing costs 12%, and federal and state taxes 15%. Gasoline prices are also influenced by gasoline demand relative to gasoline supply. So how strong, indeed, is the relationship in the United States between crude-oil and gasoline prices?
To answer that question, I examined the daily prices of crude oil (from EIA) and regular gasoline (from GasBuddy). The 10-year period covered was from April 24, 2008 through April 23, 2018. Although the gasoline prices were available for each day throughout this period, the crude-oil prices were not available for weekends, holidays, and selected other days. Therefore, the analysis included only those days for which both prices were available—a total of 2,518 days.
Even a cursory look reveals that the relationship between the two sets of prices is not perfect. During the examined 10-year period, crude-oil prices peaked on July 3, 2008 at $145.31/barrel, while the gasoline prices peaked on July 16, 2008 at $4.103/gallon. Furthermore, oil prices reached their minimum on February 11, 2016 at $26.19/barrel, but gasoline prices reached their minimum on December 29, 2008, at $1.592/gallon.
Nevertheless, the correlation between the two sets of prices was positive (as one goes up, so does the other) and strong, with the correlation coefficient of +0.93. (A correlation coefficient can be between ±1 for perfect correlation and 0 for no correlation.) Introducing a short-term time lag between the price of crude oil and the price of gasoline did not influence the correlation substantially: The correlation coefficient was +0.94 for a 5-day lag in the present database, and +0.93 for a 10-day lag.
Another way to look at the relationship between the two sets of prices is to calculate the price of gasoline (per gallon) as a percentage of the price of crude oil (per barrel). This value averaged 4.0%, with a minimum of 2.8% and a maximum of 7.0%. The correlation between this percentage and the price of crude oil was negative, with the correlation coefficient of -0.83. The negative relationship implies that at higher prices of crude oil, the prices of gasoline tend to correspond to lower percentages of the price of crude oil, and vice versa. (For example, when the crude oil prices were at their maximum, this percentage was 2.8%, while when the crude oil prices were at their minimum, the percentage was 6.5%.) This relationship is consistent with the fact that the price of gasoline depends not only on the price of crude oil, but also on the costs that are either unaffected by the price of crude oil (taxes), or are affected less strongly (refining costs, and distribution and marketing costs).
In conclusion, as expected, the price of gasoline is strongly (but not perfectly) correlated with the price of crude oil, and the introduction of a short-term lag between these two sets of prices does not affect the relationship substantially. However, the relationship between the prices of gasoline and crude oil is complicated by the fact that other factors besides the price of crude oil affect the price of gasoline.
Michael Sivak is the managing director of Sivak Applied Research and the former director of Sustainable Worldwide Transportation at the University of Michigan.
Gasoline prices are from information provided by GasBuddy, a fuel price tracking website. The crude-oil prices are spot prices at Cushing, OK, for West Texas Intermediate crude oil.