Michael Giberson
Reported in The Hill’s E2 Wire: “Senate to hold hearing on surge in gas prices.”
Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Ore.) will soon convene a hearing on soaring gasoline prices that he contends have “no reasonable explanation.”
Average nationwide gasoline prices have risen by nearly a half-dollar per gallon since the beginning of the year.
“I think you ask the question, ‘what is going on to make the prices go up so dramatically now?’ The custom has always been — one we didn’t enjoy in America but it has been sort of a tradition — [that] prices go up in the spring. We are still in the winter,” Wyden said Friday.
Let me explain the issue, clear up the confusion, and save the Senate and a handful of expensive lobbyist the trouble of having a hearing.
Since the middle of December, the world price of oil (Brent benchmark) jumped up to about $117 bbl. On average over the last 20 years, gasoline prices equal approximately 70 cents plus the price of crude oil times 0.027. With a priced of crude oil of $117, we should expect a gasoline price of about $3.859.
According to U.S. EIA data, the current national average price for “Gasoline–All Grades” is $3.851. (See the Febrary 25, 2103 data in this EIA price series.) The current gasoline “price surge” is giving us a price which is typical given current world crude oil prices.
Simple politics trumps simple arithmetic every time. The President wants gasoline prices to go up, yet members of his party in the Senate don’t seem to understand.
“What we have here is a failure to communicate.”
I am sympathetic to your bottom line point, but I don’t think your analysis is particularly convincing. Most importantly, you fail to explain why Brent prices are high. A skeptic would likely respond, “you just say high oil prices imply high gasoline prices! so why are oil prices abnormally high!?”
(Also, you exclude any mention of unexpected refinery outages, although this is a secondary point.)
libert, I agree I don’t explain why the Brent price is high, but I suspect ordinary demand and supply analysis offers enough of an explanation. China’s growth has slowed, but it is still growing, and so buying more oil than in the past; Saudi Arabia announced at the end of the year they were slowing output slightly. I don’t think there is much in the way of mystery in crude oil prices.
And so, given that gasoline prices are just about where we’d expect them to be for crude oil prices of $117, not much reason to get into refinery outages and so on for an explanation. Not much reason to look beyond crude oil prices for an explanation of gasoline prices.
Of course, given my simple arithmetic is based average U.S. gasoline prices, I’m certainly not catching any regional differences as may be caused by refinery outages or other unexpected bottlenecks in gasoline distribution.
In any case, our Senator is worried about gasoline prices not oil prices (or oil prices only incidentally) because gasoline prices are high and voters want their politicians to do something. The Senator wants to look busy because suddenly, and temporarily, voters are interested in the issue.
Your alpha of .027 is interesting. There are 42 gallons in a barrel, so that alone would call for a coefficient of .024. The difference between your alpha and 1/42 is about 13%. I would guess that that mark-up ($1 on $8) accounts for the cost of refining crude into usable product. The extra $0.70 is $0.50 in taxes, and the other 20 cents would probably be transportation and distribution.
Fat man, your numbers seem to parcel out the costs about right.
Fat Man,
Surely you are not suggesting that crude oil does not magically and/or mystically find its way to my corner gasoline station as three different grades of gasoline plus low sulfur diesel.
Whodathunkit!