Monday, June 23, 2014

Calculating gasoline prices

A long time ago I did a calculation on how much the price of a barrel of oil effected the price of gasoline.  Great minds think alike, or something like that, and James Hamilton at Econbrowser has come up with a slightly different way to do the calculus.
I did a bottom up number crunch, and he instead looked at how the historical prices correlated:
James Hamilton, Econbrowser, 21 June 2014 (hat tip: NC)
The relation implies that a $10 increase in the price of a barrel of Brent crude oil is typically associated with a 25 cent increase in the average U.S. retail price of a gallon of gasoline
Note, this type of estimate is generally much more accurate than a build it up from the pieces, detailed approach.  It will miss major changes in the dynamics of the situation, but most micro-approaches will do that as well.
What I find interesting is that if you put $222/barrel into their calculator, you get a gasoline price of $6.39/gallon.  When I did the calculation in 2011, I came up with a price of $6.16/gallon.  Given the number of assumptions I had to make, and stated, that seems pretty good to me.


James M Dakin said...

The way people piss away $4 gas in giant trucks wasting trips, I can't imagine $6 will slow the flow much. For consumers. Business, on the other hand...

russell1200 said...

James: It will kill the blue collar and service worker folks. But they have been taking a beating for so long, I suppose it will be yet another item that gets them borrowing even more money. So I guess why I am saying is that for them I see it as an accelerator, not the wall.