Where the Price of Gas Could Be Headed

I’ve talked the price of gas a few times (here, here and here) during its recent decent. James Hamilton who is the professor of Economics at the Univ. of California in San Diego recently discussed the price of gasoline and its relationship to Brent crude on his blog Econbrowser, except below.  

From James Hamilton:  

The price of gasoline and price of Brent turn out to be cointegrated, meaning that any permanent change in the price of Brent eventually shows up as a permanent change in the price of gasoline. The coefficients of the above relation are very much what you’d expect. A barrel holds 42 gallons, and the estimated coefficient (0.025) is 1/40. The intercept (0.84) captures an average state and federal tax of 50 cents per gallon plus a bit over 30 cents in markups and other costs.

With Brent on Friday at $91.50 and an average retail gasoline price about $3.47, we’d thus expect gasoline prices to come down another 35 cents a gallon or so from where they were on Friday. Historically those adjustments usually come pretty quickly. For example, last December U.S. gasoline prices temporarily fell about 25 cents/gallon below the long-run relation, but by March they were right back on track.

If gasoline prices do fall from their value in April near $3.92 to $3.12, that would be an 80 cents/gallon swing. With Americans buying about 140 billion gallons of gasoline each year, that translates into an extra $112 billion over the course of a year that consumers would have available to spend on other things besides gasoline.

Source: Gasoline prices coming down  

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About Andrew Thrasher

Andrew Thrasher is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.

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