Are Oil Prices and Gas Prices Related?
A few weeks ago, I had a nationally distributed op-ed on the "gas price conspiracy," where I made the claim that the main economic reason that gas prices have come down is because crude oil prices have come down. Seems simple and obvious.
Here is what I wrote: "The simple truth is that changes in the world price of crude oil account for nearly all changes in the retail price of gasoline -- and so recent international events such as an easing of tensions in the Middle East and growing inventories of oil exerted substantial influence in reducing both oil and gasoline prices -- exactly what textbook economics tells us to expect."
Here is a question from a reader in San Diego:
I read your editorial in the San Diego Union Tribune. Interesting stuff. You make the claim that gas prices have come down because the price of crude has come down. My question is this: Since crude prices have come down ~25% and since the price of crude accounts for ~50% of gas prices, why aren't gas prices in the $2.60 range? How do you account for this discrepancy?I sent the reader the chart above that shows graphically very clearly the direct relationship between crude oil prices and retail gas prices.