Gas and Oil Prices
Published on 24 May 2007 at 3:44 am.
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Filed under Energy, Uncategorized.
Gasoline prices are skyrocketing. In some parts of the country, the price of gasoline is expected to hit $4.oo a gallon. Furthermore, while there is a correlation between oil and gas prices, there has been an alarming net increase of gas prices with respect to oil. Here I show that 60 cents per gallon of today’s gasoline costs are unexplained by the oil prices.
The above graph is taken from OILNERGY and shows the oil and unleaded gasoline prices (among others) over the last year. Clearly one can see by visual inspection that the two curves are correlated. The point to notice however, is that there has been a growing gap between the two curves indicating that gasoline prices have been increasing with respect to the oil prices. This is what those in the media are referring to when they say that the prices are no longer correlated.
I collected the following data from the U.S. Energy Information Administration’s This Week in Petroleum website and made some useful graphs. First look at the Crude Oil WTI prices
The gasoline prices are clearly correlated, as one would expect
To compare the oil prices to the gas prices, I adjusted the oil prices by subtracting the mean oil price, rescaling the oil price so that it is on the same scale as the gas price, and added the mean gas price:
[tex]Oil_{adj} = (Oil-Oil_{mean})*\frac{\sigma_{gas}}{\sigma_{oil}} + Gas_{mean}[/tex]
where [tex]\sigma_{oil}[/tex] represents the standard deviation (scale) of the oil prices and [tex]\sigma_{gas}[/tex] represents the standard deviation (scale) of the gas prices .
The figure above plots both the gas prices with the rescaled oil prices. The result is that the gas prices follow the rescaled oil prices pretty well, which indicates that the price of gasoline is approximately linearly proportional to the price of oil. However, since April 2007, the gas prices have begun to deviate from this linear correlation by as much as 62 cents a gallon on May 14. Given that the price of a gallon of gas was $3.07 on that date, this is a 20% unexplained deviation. This difference plot is shown below, where green indicates that gasoline is lower than average from the rescaled oil price, and red indicates that it is higher than average.
This deviation is of a magnitude unseen in the last two years. A 20% deviation like this requires an explanation, and the nature of the deviation indicates that a new mechanism is at work.
Kevin Knuth
Albany NY
