Wednesday, June 27, 2018

The Link Between Crude Oil And Gasoline Prices

Customers pump gasoline into their cars at a gas station in the Bronx, where gas prices have been raised to over $ 3.00 per gallon, June 1, 2018 in New York. - Rising gasoline prices in New York is having an effect on Uber and Lyft drivers revenues. This due to a rise on oil prices. (Photo by Don EMMERT / AFP) / TO GO WITH story by Ali BEKHTAOUI on 'Uber, Lyft drivers pinched by higher gasoline prices' (Photo credit should read DON EMMERT/AFP/Getty Images)


Although oil prices have been all the talk, given last week's OPEC+ decision to add 1 million b/d of new supply, let's hit on oil's most important product: gasoline, where prices have been falling from their four-year highs. Crude oil (petroleum) of course is the main input to making gasoline, so the price of it accounts for most of the price of gasoline, 50% last year but almost 70% back in 2011. With "OPEC Deal a Fantastic Opportunity to Get Short WTI," gasoline prices could fall further as U.S. crude production is closing in on another record of 11 million b/d.

Oil prices constitute the bulk of the price of gasoline.

It's no wonder then that we've seen a very clear connection between the price of crude oil and the price of gasoline . Low oil prices are therefore especially important because they lead to lower gasoline prices, which critically means more disposable income for Americans to spend and expand the economy. Some 75% of U.S. economic growth is built on consumer spending. Gasoline is the classic low elasticity product, where changes in prices have little influence on demand. Yes, electric vehicles and alternative transportation fuels/methods are becoming more important, but gasoline will remain Americans' main fuel to travel for decades to come. In fact, absolute reductions in U.S. gasoline demand have been non-existent.

Crude oil prices largely determine the price of gasoline. The link through the years has been right on target.

As we head deeper into summer 2018, remember that this is when we typically see the highest gasoline prices. Obviously, the nicer weather encourages more driving and thus more demand, but the higher quality, more expensive summer blend required to hit the market by May 1 also spikes prices in the hotter months. Ultimately as I see it, with our country expected to add $16 trillion in economic growth (a conservative estimate IMO) and 130 million more people by 2050, projections of significant declines in U.S. gasoline demand (and/or oil demand) can be chalked up to wishful thinking . Substitutes are few and far between.

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