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  • The Crack Spread and Gas Prices

    We tend to look away from a lot of reports on rising gas prices. Much like weather, gas prices are low hanging fruit for news media to attract eyeballs without providing any real analysis. But there are exceptions. In the below interview, for example, the Wall Street Journal 's Paul Vigna explains exactly why prices are up again, and it provides a nice case study on how the various parts of a supply chain affect consumer costs. In the case of the most recent rise, it has to do with the gap between what refiners get for the price of crude oil and the price of wholesale--or "the crack spread":

  • Key Factors in Gas Prices from State to State

    When we look at how much the cost of a gallon of gas varies from state to state, the first cause that comes to mind is the different tax rate for gas from state to state. But while that explains part of the cost variance, it does not account for all of it. At Econbrowser , James Hamilton breaks down the key factors in state gas prices in a series of helpful maps. First, there is this map from GasBuddy.com that shows how different gas prices can be from state to state, or even county to county: So while taxes are a major factor, Hamilton cites a number of other key factors, like state requirements for the quality of fuel, and the cost of crude oil at regional refineries: For example, sweet crude in Louisiana is currently fetching $125 a barrel, or $27 more than its counterpart in Wyoming. If the refined product market in Wyoming were completely separate from that in the rest of the country, we might then expect gasoline in Wyoming to be 68 cents/gallon cheaper than on the coasts as a result of differences in the cost of crude alone. But the refined markets are not completely separated, and no producer would want to sell gasoline in Wyoming if you had an easy way to get it to somebody willing to pay 68 more cents per gallon for it. Although America's pipeline system for transporting crude oil is not up to the task of moving all the crude available in Wyoming to refineries in Louisiana, the infrastructure for transporting refined products is somewhat better. The result is that Americans in the middle of the country pay more and those on the coasts pay less than they would if the product markets were completely isolated geographically. The equilibrium price differential is the one that equalizes the return from selling in different markets after taking into account transportation costs. Read Why do gasoline prices differ across U.S. states? here .

  • Gallup: Economic Optimism 'Volatile'

    After reaching a 4 year high the previous week, Americans' optimism in the state of the economy dropped again last week, according to Gallup . The Gallup Economic outlook rating and Current conditions rating both dropped last week: From the report: The exact reason for the slight deterioration in confidence last week is difficult to determine. One proximate cause could be -- at least to some degree -- continually increasing gas prices at the pump. Gas prices are not only approaching the psychologically important price of $4.00 a gallon, but are expected to exceed $5.00 a gallon in some areas in the months ahead. Gallup finds that Americans on average say they would not significantly change their lifestyles until gas prices reach the tipping point of $5.30, suggesting that the true impact of current gas prices on economic confidence is difficult to assess with certainty. Further, despite the latest decline in confidence and the surging gas prices, economic confidence remains better now than it was during the same week one year ago (-31). Read the full report here .

  • Impact of Rising Oil Prices Big on Political Rhetoric, Small on US Economy (so far)

    Wall Street Journal Economics Reporter Ben Casselman says to try and put the idea that there is a key "threshold" for gas prices--a price at which the economy "comes to a halt." Meanwhile gasoline prices keep climbing--though not to levels of a year ago. Yet. And the key questions to consider now are how fast are prices rising, and what is the impact on consumer behavior rather than what consumers are saying about prices. Here is Casselman speaking on what economists are focusing on as they watch oil prices climb:

  • Impact of Oil Prices on Gas Prices: or What drivers can expect to pay at the pump

    With Iran cutting off its oil from Britain and France, oil prices have climbed to a nine-month high this week . So what will the impact be on gas prices here in the US? The answer may not be quite as simple as "gas prices rise when oil prices rise," says Econbrowser 's James Hamilton . There's speculation involved, and the price fluctuations do not always follow as we expect: Here's a closer look at the data over the last year. Average U.S. gasoline prices fell more than you would have predicted based on the Brent price. They have since come back up. But Brent has surged another $10/barrel over the last two weeks, and gasoline prices have yet to catch up to that latest move. Based on the historical relation, we might expect to see the average U.S. gasoline price rise from its current $3.59/gallon up to $3.84. One factor that's been driving Brent and WTI up over the last few weeks has been rising tensions with Iran. But why should threats or fears alone affect the price we pay here and now? Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation: We're seeing panic buying in Europe and Asia because they're absolutely convinced that they're not going to be able to buy Iranian oil or there's going to be some kind of conflict that disrupts the transport of oil through the Strait of Hormuz.... there is a lot of hoarding in case the worst-case scenario happens. Asian buyers have been buying up West African crude like it's going out of style. Does it make sense for consumers to suffer now just because of something that may or may not happen in the future? If there are significant disruptions, the answer will turn out to be yes. We'll be glad that we used a little less today, and left a little more in storage, to help us better cope with the huge challenges we'll be facing in a few months. If the answer turns out to be no, then this is all just a lot of pain for nothing. Read Crude oil and gasoline prices here . Also see Oil Prices and Consumer Spending from the Richmond Fed .

  • With Libyan Rebels Advancing on Central Tripoli, a Look at Impact on Oil Prices

    There is still considerable uncertainty in Libya, but the BBC is reporting that rebels have taken control of much of central Tripoli . If we see an end to the fighting in Libya, we will soon be able to take a look at the potential economic impact of an end of four decades of Gaddafi's rule. At The Big Picture , David Kotok lays out what he thinks is likely to happen "if and when the Qaddafis lose and leave": In short order, Libyan oil production will ramp up. As it does, oil prices in world markets will fall and oil futures markets will reflect the expected increase in production of oil from Libya. The key prices to watch are those trading in Europe, like Brent. US oil prices (WTI) are no longer the leading indicator of world prices intersecting with world supply/demand. Excess inventory at Cushing, OK is complicating the pricing structure. We expect oil prices to fall when highly desirable, sweet Libyan crude production is fully resumed and enters the pipeline. Maybe, they are going to fall by a lot. This will come as a much-needed boost to the US economy and to others in the world. Remember: the oil price acts like a sales tax on consumption. To clarify this relationship we convert crude oil prices to gasoline prices and then estimate what a change in gas price will mean for the American consumer. Roughly, a penny drop in the gas price per gallon gives Americans 1.4 billion more dollars a year to spend on other than gasoline. That is a huge stimulant to the economy. The ratio is different in Europe because the gas taxes are so much higher there. Nevertheless, it is still significant. Read Qaddafi, Bernanke & Stock Markets here .

  • Where the Cars Are, and Where the Gas is Needed

    Gasoline prices have come down a bit in the last couple of weeks, but remain still about a dollar per gallon higher than last year, according to the Christian Science Monitor . While prices will likely continue to drop, few hold out hope for prices approaching last year's $2.70 a gallon. Not that anyone is expecting oil demand to slow at any point in the near future, but in case you wanted a clear picture of where demand will significantly increase in the coming years, take a look at this graph from Stuart Stanford 's Early Warning blog. Stanford shows coming growth in the number of cars and trucks in China, as extrapolated from the recent growth rates, and compared to the still growing (though at a very different rate of late) fleet in the US: Read Chinese vs US Vehicle Fleets here .

  • Gas Prices Up, Consumer Sentiment Down

    Consumer sentiment is dropping, according to the University of Michigan's Consumer Sentiment Index . Here are the key survey findings from Reuters : The preliminary March reading of the University of Michigan's consumer sentiment index for March came in at 68.2, down from 77.5 in February. That was the lowest level since October 2010 and was well off the median forecast of 76.5 among economists polled by Reuters. The survey's barometer of current economic conditions was at 83.6, down from 86.9 the month before and below a forecast of 86.0. The survey's gauge of consumer expectations tumbled to 58.3 from 71.6, the lowest level since March 2009. Here's a look at the Consumer Sentiment Index since 1978 (chart from James Hamilton ): At Econbrowser , Hamilton shares some helpful research on the relationship between rising gas prices and consumer attitudes: We had been getting some good economic news on other fronts lately, which I had been hoping would be enough to offset the hit to consumers' budgets from energy prices. The March numbers so far are just preliminary, and consumer sentiment is a somewhat noisy indicator. But whatever you make of the latest report, it is not good news. Another question asked in the survey pertains to expectations of inflation. Consumer expectations of inflation for the next year jumped from 3.4% to 4.6%. Again gasoline prices seem to figure more prominently in consumers' expectations than we might have expected, and again we can do a simple mechanical calculation of the direct effect. Gasoline prices have a weight of about 5% in the CPI, so if all other prices were held fixed, the 20% increase in gasoline prices we've seen over the last 3 months would add about one percentage point to the CPI. Read Consumers see bad news here .

  • The Big Picture Chart of the Day: What You're Paying for a Gallon of Gas

    Gas prices rose more than 10 cents this week. The average price of gas in the US today is over $3.47, according to AAA . The Big Picture 's chart of the day is an appropriate one. Macroman used data from the U.S. Energy Information Agency to chart the cost of a gallon of gas since January, 2000. And notice the fluctuation of the cost of crude, as a percentage of the cost of each gallon of gas: See the full size chart, and read Macroman's analysis here .

  • Rising Gas Prices Lift CPI

    The Consumer Price Index rose 0.9% in June. The seasonally adjusted rate of growth was 0.7%. The rise in energy prices seems to be a key factor, as the gasoline index rose 17.3 % in the month, according to the Bureau of Labor Statistics , but it was not the only index that turned up. Food reversed price declines from May, and the housing index held steady after three months of decline. The year to-date trends look strong overall: The CPI-U all items index advanced at a seasonally adjusted annualized rate (SAAR) of 3.3 percent in the second quarter of 2009 after increasing at a 2.2 percent rate in the first quarter. This brings the year-to-date SAAR to 2.7 percent and compares with a 0.1 percent increase in all of 2008. The index for energy, which fell 21.3 percent during 2008, rose at a 14.8 percent SAAR in the first six months of 2009. Energy commodities increased at a 52.1 percent rate in the first half of the year, while energy services declined at a 13.6 percent rate. The index for food declined at a 1.1 percent SAAR in the first six months of 2009 after rising 5.9 percent in all of 2008. The food at home index declined at a 3.8 percent rate during the first half of 2009 after rising 6.6 percent in 2008. Read the BLS report here .