When the price of oil decreases, what happens to the price of gasoline?

We turn on the morning news and learn that the price of a barrel of oil has reached a 6 month high, or a 6 month low, or has not changed at all.

But what is the impact of these oil price changes on the price of gasoline at our local Exxon station?  One would think that the two prices should move in parallel.  But is that really the case?

The table below illustrates how the price of a barrel oil has changed over the past 8 years.  Alongside the change in oil prices, we see the change in gasoline prices.

Year

 (A)

 

 Gal of gas (B)

Barrel

of oil (C )

Ratio (D)

 

Price of  gas

should be (E)

we overpaid (underpaid) (F)

2005

 2.75

66

  24

   2.54

    0.21

2006

 2.76

43

  16

   1.65

    1.11

2007

 2.76

89

  32

   3.42

    (0.66)

2008

 3.91

146

  37

   5.62

    (1.71)

2009

 2.70

66

  24

   2.54

    0.16

2010

 2.76

78

  28

   3.00

    (0.24)

2011

 3.33

80

  24

   3.08

    0.25

2012

 3.34

77

  23

   2.96

    0.38

Column B above indicates the price of a gallon of gas.

Column C indicates the price of a barrel of oil.

Column D shows the ratio between the two.  In 2006, a barrel of oil was 16 times that of a gallon of gasoline.  Two years later, this ratio was 37.

Based on an average ratio of 26, column E shows what a price of a gallon of gasoline should have cost, if the relationship between oil and gasoline were constant.

Finally, in column F, we see how much we overpaid or underpaid at the gas pump.  At the moment, we are being overcharged by 38 cents for each gallon of gas that we buy.

Advertisements

About Howard Zien
Howard P. Zien is the president of Business Logic Incorporated. He has been in the consulting and software development field since the early 1970s. A graduate of Princeton University, Howard earned an MBA in accounting and finance from New York University's Stern School of Business.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: