Thursday, October 25, 2007

What's Driving Gasoline Prices?

From the Federal Reserve Bank of Dallas:
Economic Letter

Anyone who regularly fills a car's gas tank knows U.S. pump prices have been high and volatile in recent years, whether measured in current or inflation-adjusted dollars (Chart 1). Most motorists are well aware that crude oil prices have surged to one record after another; yet the ups and downs in gasoline prices sometimes seem confusing. This spring, gasoline was getting more expensive at a time when oil prices were falling. Just a few months later, oil had been bid back up, but gasoline prices didn't seem to respond. These apparent disconnects prompted our examination of the forces that determine gasoline prices. Our econometric models confirm the traditional result that crude oil prices dominate movements in gasoline prices, but they also show that seasonal and nonseasonal movements in consumption, refinery production, imports and inventories influence gasoline prices in the short term. Including these other factors with crude oil price provides a nearly complete picture of gasoline pricing in the U.S. market....

...The outlook for crude oil prices can change significantly with economic conditions or geopolitical events, but in October the futures market anticipated a decline from this year's high levels over the next few years. WTI is expected to slide from $87 a barrel to $75 by the end of 2010.

Using those crude oil prices, our model suggests that spot gasoline prices will rise by 20 cents in the next few months, then decline by about 35 cents a gallon over the next three years, with seasonal variations during each year of about 27 cents a gallon. Retailing costs will mean slightly higher actual pump prices, of course, but the general outlook suggests a decline in gasoline prices, although they will remain relatively high.

The U.S. economy has continued to grow, with strong consumer spending and relatively tame inflation, despite rising and volatile gasoline prices in recent years. Household budgets won't get much relief, but continued high gasoline prices probably aren't going to be an unbearable burden for the economy as a whole....MORE