Retail Gasoline Prices and Crude Oil — The Market is Efficient

A recurring comment from many people has been a believe that there is no relationship between crude oil prices and refined gasoline prices.  They believe they are taken advantage of when buying gasoline.  In simple English, they want to know if consumers are getting ripped off at the pump.

To find out if that is true, monthly average gasoline prices since January 1994 were statistically compared to monthly average crude oil prices.  The graph shows a relatively tight relationship between the two.  As shown, there are times when gasoline prices are less than anticipated and other times when prices are slightly greater.  This makes sense as not only is there the cost of the crude oil as input, but also the cost of refining, delivery, retailing and taxes.  The last new U.S. refinery was built in 1976, although many have been expanded in recent years.  Today there are 149 operable refineries in the U.S. with a daily capacity of 17.6 million barrels.  Not all gasoline is created equal—and not just the octane rating.  Many geographic areas are required to sell reformulated (oxygenated) gasoline that reduces emissions (Implementation of the Reformulated Gasoline Program).  Some of these markets include Houston and Southern California, for example.  These blends typically cost more to produce and hence retail for more at the pump.

A regression was run using retail gasoline  prices, all grades and all formulations as the dependent variable and crude oil prices as the independent variable.  The model is highly statistically significant with an overall F statistic of 5,715, and has statistically significant t-statistics on the intercept and coefficient and an adjusted R Square of 0.964228.  Crude oil prices alone since 1994 have explained 96.4 percent of all variability in gasoline costs.

Using the model (shown in the table below), a grid was developed relating retail gasoline prices to crude oil costs.  Crude oil at $100 should equate to $3.50 per gallon (which is extremely close today – November 15, 2011—with an average of all three grades of gasoline at $3.55 (daily fuel gauge report) and the spot oil price at $99.37 per barrel.  At $150 per barrel, gasoline should be cost $4.92 per gallon.

So are consumers getting gouged at the gas pump relative to crude oil prices?  Not at all.  You can go ahead and argue that crude oil costs are too high, but recall that oil is priced on a global market.

The next question frequently posed by consumers is the relationship between regular and premium gasoline costs.  A higher-octane fuel allows an engine to run at a higher compression ratio producing more power—and that fuel costs more to produce.  Refiners do vary the octane levels throughout the various seasons and across locations due to relative  temperatures.  The following chart shows the relative costs of regular and premium formulations.

Ten years ago premium gasoline cost an average 18.1 cents more per gallon than regular (a spread of 12.3 percent.  Today, premium costs 24.6 cents more per gallon than regular, a spread of just 7.2 percent.  Even the spread on premium gasoline is economically logical.

A sideline from the AAA site referenced regarding oil prices is the comparative cost of E-85 at $3.08 per gallon (15 percent ethanol). On the surface E-85 looks very affordable compared to Regular ($3.41), Mid-Range ($3.56) and Premium ($3.69).  E-85, however, has much less energy per gallon (fewer British Thermal Units) and that means that a gallon of E-85 will not fuel a vehicle for as many miles as a gallon of gasoline.  The AAA adjusts the E-85 to allow for the reduced energy content and restates an adjusted effective cost of $4.05 per gallon. That makes E-85 the highest-priced gasoline-based fuel to power your vehicle. A gallon of diesel was $3.97 per the AAA.

While I know this is not truly real estate related, the costs do impact consumers of real estate as energy costs essentially come out upstream of housing costs.  While people can still complain about the costs of crude oil, they need to recall that oil is priced in a global market place.

Bottom line is that there is some economic consistency in gasoline costs and crude oil costs.

There is one thing guaranteed, however, and that is that all of these prices will change.  And long-run trend will be up.  And that means that consumers will have less to spend on all other expenses.


  1. Rey Griffth

    My spouse and I absolutely love your blog and find almost all of your post’s to be just what I’m looking for. Does one offer guest writers to write content for yourself? I wouldn’t mind publishing a post or elaborating on most of the subjects you write concerning here. Again, awesome blog!

    1. Ted C. Jones Post author

      Appreciate the kind words. You are more than welcome to respond to a blog or suggest a topic but we do not use guest writers. Enough people have offered I would not have to write any more.Thanks, Ted

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