Thursday, May 22, 2008

Gas & Diesel Prices Should Be Higher (Like, already $5 a gallon)

I've been watching the recent run-up in gas and diesel prices, and comparing them to the recent run-up in oil prices per barrel, and to me, the numbers don't quite add up.

So, I decided to make a quick spreadsheet to confirm my suspicions. Nothing complicated -- I just took some readings of the oil price, average gas price at the pump and average diesel price at the pump. I did this for winter, spring, summer and fall (January, April, July & October) of 2007 and 2008, and then again for January and May of this year.

For example, in January 2006, the average price of gas (U.S.) was $2.35/gal. The average price of diesel (in Oregon) was $2.41 a gallon. The oil price per barrel was $62.50. This resulted in a ratio of 0.00376:1 for gas, and 0.00386:1 for diesel; that is, the price of a retail gallon of gasoline (including taxes) was 3.76% of the price of a barrel of oil, or 3.86% for a gallon of diesel.

Simple stuff.

In July of 2007, just to give another example, gas was $3.00/gallon (4.14% of a barrel of oil), and diesel was $2.83/gallon (3.90% of a barrel of oil).

Now, however...

In May of 2008, gas is about $3.80/gallon (nationwide U.S. average, your pump price may be considerably higher), and diesel is at an average price of $4.15 (though obviously, it's selling for higher in many places).

That's about 2.86% of the price of a barrel of oil (which just hit $133 yesterday) for gas, and 3.12% for diesel.

The average ratio from January 2006 through January 2008 was 3.80% for gas, 3.97% for diesel.

If we just multiply these numbers by the current price of a barrel of oil, we see that...

Gas SHOULD be selling for $5.05 a gallon, and diesel SHOULD be selling for $5.28 a gallon.

Let me repeat that...


GAS: $5.05/gallon

DIESEL: $5.28/gallon

(Based on what prices SHOULD be, according to historical average ratios of gas & diesel pump prices to the price per barrel of oil over the past two years)

For whatever reason, as far as I know, we haven't seen these average prices anywhere in the country, not even in downtown San Francisco (sure, a couple of stations have already passed the $5 a gallon mark, but not the city as a whole). And that's the most expensive major market in the country, by most measures, when it comes to retail gas prices.

You can quibble with my methodology. This is not a Ph.D. thesis. It's just a back-of-the-envelope calculation.

My prediction? Unless oil prices come down rapidly and steeply, we're going to see pump prices rocket past $5/gallon for both gas and diesel. The only question is when. Next week (after Memorial Day)? Next month? I don't see how the currently-low prices are sustainable.


Oil Prices per Barrel
Gasoline Prices at the Pump
Diesel Prices at the Pump through Feb. 2006
Current Diesel Price

Finally, here's the spreadsheet:


Matthew said...

So according to this math, back when oil was $20/barrel, (in 2003,) gasoline was 74 cents? (It wasn't.) Likewise, if you calculate the ratio for 2003, and then use that to estimate the price of gasoline today, you get ~$8/gallon... So I think it is isn't that simple.

Certain things, like transporting the finished gasoline to the retailers, should go up percentage wise with the price of oil, (since it takes fuel to move the fuel), but other things, (gas taxes,) do not. You pay the same amount of taxes on a gallon of gasoline regardless of if the oil was free, or if it is $1000/barrel. Most of the costs are somewhere in between: Labor prices don't suddenly double when oil prices do, but it should go up somewhat...

Garlynn Woodsong said...

For more on this topic:

Also, I think my math is correct: Diesel is now $5.25 a gallon at many stations, and gasoline is fast catching up.

Did I ever claim the math was perfect? No. I warned you that it was a rough, back-of-the-envelope prediction. If you'd care to use much better numbers and run a better analysis yourself, please -- provide me with a link to the results!


Chris Rogers said...

The reason you are seeing this disparecy is that gas station owners have less leash than the refiners do. As the gas prices go up, they cannot raise the rates quite as fast -- otherwise they risk being accused or price gouging, etc.

In fact the other day on the news, I heard about Visa and other processors are trimming their merchant fees to gas stations since the wholesale gas prices have risen to the point they all of their price margin is actually going to paying their credit card merchant fees.

Another interesting point is that big oil is getting out of the retail oil business citing lack of profitablity. (

D Morse said...

My understanding is that tere's this little intermediate step called "refining", and it's what converts crude to gasoline. The price of that process is a sizable fraction of gasoline cost, and it's not proportional to the price of crude per barrel.