The Quick Way to Predict the Price of Gas

by The Wall Street Geek on September 26, 2012 · 3 comments

Would you rather fill your tank with gas, or light a pile of money on fire? Tough choice, because the price of gas is so high that the choices are almost equal.

The price of gas has been so high for so long that households have to put it in their budget. Talk to people deciding between living in Manhattan vs. Brooklyn, for example, and part of the decision involves paying for transportation.

The price of gas is starting to fall a little — however, it’s still close to its 10-year high. The average price of all grades of conventional retail gas in the US hit a 20-year high in July 2008 ($4.01). As of September 2012, the average price is $3.89:

Price of Gas

What if you could peek into the future and know if someday you’ll have extra cash in your budget from lower gas prices? Or know if you should stop having your daily latte to save for higher prices?

The price of crude oil is the top predictor for the price of gas that you buy at the pump.

The belief has been that the price of gas lags 3-6 months behind the price of crude oil. Actually, it doesn’t.

Oil companies refine crude oil first before it’s called gas and goes into your car. Approximately 2/3 of the price of gas is the cost of crude oil, and the remainder of the price of gas includes the cost of refining, distribution, taxes, and gas station owner discretion (according to the US Energy Information Administration). Gas station owners buy gas wholesale from refineries, and sell it to you at whatever price they feel is competitive.

The belief has been that changes in the price of crude oil aren’t reflected in the price of gas until 3 to 6 months later, after the refining process and after gas station owners have to buy oil at new prices from refineries.

However over the past 10 years, not only has the price of gas been 97.4% correlated to the price of crude oil, but gas station owners have reacted to the change in crude oil prices much more quickly than 3 to 6 months:

Price of Gas Price of Crude Oil

I observed that gas station owners tend to price gas at approximately 3.31% the price of crude when the price of crude is over $100. They price gas at approximately 4.3% of the price of crude when the price of crude is below $100. The lag has almost been nonexistent for the past 10 years.

Perhaps it’s the speed of information these days, but the price of gas changes swiftly to the price of crude — and even to the value of the dollar and tensions in the middle east.

Now, at least you have a rule of thumb to guide you. Although no change in gas prices will make me skip my morning coffee.

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Price CapitalAfter turning $1100 into $7015 in the stock market right out of college, Michelle worked 15 years on Wall Street at Morgan Stanley, Citigroup and Goldman Sachs. She wrote "How to Buy Stocks Online", and is a fee only financial advisor providing investment help in New York City.

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