Econbrowser on Falling Gasoline Prices

Jim Hamilton has a a great post on the fundamentals underlying his correct prediction of falling gasoline prices. Lots of great information about the connection between spot and forward prices, and what you can infer from forward prices about expectations. He also discusses the reasons for this relatively precipitous decline in retail gasoline prices.

So why are gasoline prices coming down so dramatically? There are important seasonal factors in U.S. gasoline prices, which are higher in the summer due to summer fuel requirements and greater gasoline demand. Everyone always seems as shocked when prices go up in the spring as when they come down in the fall, even though to some extent that same pattern is repeated every year. However, much more than just the usual seasonal is in operation this fall. The drop in crude oil prices, down $14/barrel over the last month, has now become the dominating factor.

He also usefully points out that the deep water Gulf discovery last week is probably not a big driver in this process; if it were, Chevron’s stock price would have risen instead of fallen, and it hasn’t. The falling stock prices of refining companies is consistent with his argument.